Question

Problem 10-9AB Effective Interest: Amortization of bond premium; computing bond price LO P1, P6 points Ellis issues 7.5%, five-year bonds dated January 1, 2018, with a $590,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $627,750. The annual market rate is 6% on the issue date. (Table B.1, Table B.2. Table B.3, and Table B.4) (Use appropriate factor(s) from the tables provided.) eBook Required: 1. Compute the total bond interest expense over the bonds' life. 2. Prepare an effective interest amortization table for the bonds' life. 3. Prepare the journal entries to record the first two interest payments. 4. Use the market rate at issuance to compute the present value of the remaining cash flows for these bonds as of December 31, 2020. Print Complete this question by entering your answers in the tabs below. References Required 1 Required 2 Required 3 Required 4 Compute the total bond interest expense over the bonds' life. Total bond interest expense over life of bonds: Amount repaid: payments of Par value at maturity Total repaid Less amount borrowed Total bond interest expense S 0 < Required 1 Required 2 >

Answer 1

Solution 1:

Total bond interest expense over the life of bond
Particulars	Amount
Amount Repaid:
10 semiannual interest payments of $22,125 each	$221,250.00
Par Value at Maturity	$590,000.00
Total Repaid	$811,250.00
Less: Amount borrowed	$627,750.00
Total bond interest expense	$183,500.00

Solution 2:

Bond Amortization Table
Semiannual interest period end	Cash interest paid	Bond Interest Expense	Premium Amortization	Unamortized Premium	Carrying Value
1-Jan-18				$37,750	$627,750
30-Jun-18	$22,125	$18,833	$3,293	$34,458	$624,458
31-Dec-18	$22,125	$18,734	$3,391	$31,066	$621,066
30-Jun-19	$22,125	$18,632	$3,493	$27,573	$617,573
31-Dec-19	$22,125	$18,527	$3,598	$23,975	$613,975
30-Jun-20	$22,125	$18,419	$3,706	$20,270	$610,270
31-Dec-20	$22,125	$18,308	$3,817	$16,453	$606,453
30-Jun-21	$22,125	$18,194	$3,931	$12,521	$602,521
31-Dec-21	$22,125	$18,076	$4,049	$8,472	$598,472
30-Jun-22	$22,125	$17,954	$4,171	$4,301	$594,301
31-Dec-22	$22,125	$17,824	$4,301	$0	$590,000

Solution 3:

Journal Entries - Ellis
Date	Particulars	Debit	Credit
30-Jun-18	Interest Expense Dr	$18,833.00
	Premium on bond Dr	$3,292.00
	To Cash		$22,125.00
	(Being first semiannual interest payment made and premium amortized)
31-Dec-18	Interest Expense Dr	$18,734.00
	Premium on bond Dr	$3,391.00
	To Cash		$22,125.00
	(Being 2nd semiannual interest payment made and premium amortized)

Solution 4:

Computation of bond price
Table values are based on:
n=	4
i=	3%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.88850	$590,000	$524,215
Interest (Annuity)	3.71717	$22,125	$82,242
Price of bonds			$606,457