Question

Accounting Question

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Ellis Company issues 9.5%, five-year bonds dated January 1, 2019, with a $400,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $424,347. The annual market rate is 8% on the issue date. 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. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 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 $ Required 1 Required 2 >

Answer 1

Requirement 1:

Total bond interest expense over life of bonds:
Amount repaid:
10 Payments of $19,000	$190,000
Par value at maturity	$400,000
Total repaid	$590,000
Less: Amount borrowed	($424,347)
Total bond interest expense	$165,653

Calculations:

Semi-annual Interest payment = $400,000 x 9.5% x 6/12 = $19,000

Total no. of payments = 5 years x 2 times = 10 times

Requirement 2:

Semiannual period- End	Cash Interest Paid	Bond Interest Expense	Premium Amortization	Unamortized Premium	Carrying Value
01/01/2019				$24,347	$424,347
06/30/2019	$19,000	$16,974	$2,026	$22,321	$422,321
12/31/2019	$19,000	$16,893	$2,107	$20,214	$420,214
06/30/2020	$19,000	$16,809	$2,191	$18,022	$418,022
12/31/2020	$19,000	$16,721	$2,279	$15,743	$415,743
06/30/2021	$19,000	$16,630	$2,370	$13,373	$413,373
12/31/2021	$19,000	$16,535	$2,465	$10,908	$410,908
06/30/2022	$19,000	$16,436	$2,564	$8,344	$408,344
12/31/2022	$19,000	$16,334	$2,666	$5,678	$405,678
06/30/2023	$19,000	$16,227	$2,773	$2,905	$402,905
12/31/2023	$19,000	$16,116	$2,905	($0)	$400,000
Total	$190,000	$165,674	$24,347

Explanations:

Cash interest paid = 400,000 x 9.5% x 6/12 = $19,000

Bond interest expense = Preceding carrying value x 4% (Semi-annual interest rate of 8% is equal to 4%)

Premium amortized = Cash interest paid - bonds interest expense

Unamortized premium on 1/1/2019 = 424,347-400,000 = 24,347, Later it was reduced by premium amortized

Carrying value = Preceding carrying value - premium amortizied

Requirement 3:

	Date	General Journal	Debit	Credit
1	June 30,2019	Interest expense	$16,974
		Premium on bonds payable	$2,026
		Cash		$19,000
		[To record first interest payment]
2	Dec 31,2019	Interest expense	$16,893
		Premium on bonds payable	$2,107
		Cash		$19,000
		[To record second interest payment]