Question

Ellis Company issues 6.5%, five-year bonds dated January 1, 2019, with a $570,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $582,159. The annual market rate is 6% 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.

Answer 1

Solution 1:

Total bond interest expense Over life of bonds:
Amount Paid:
10 Payments of ($570,000*6.5%*6/12=$18525) each	$1,85,250
Par Value at maturity	$5,70,000
Total Repaid	$7,55,250
Less: Amount Borrowed	$5,82,159
Total Bond interest Expense	$1,73,091

Solution 2:

Effective Interest Amortizatiin Table
Semiannual period-End	Cash interest paid	Bond Interest expense	Premium amortization	Unamortized premium	Carrying value
01-01-2019				$12,159	$5,82,159
6/30/2019	$18,525	$17,465	1060	11099	581099
12/31/2019	$18,525	$17,433	1092	10007	580007
6/30/2020	$18,525	$17,400	1125	8882	578882
12/31/2020	$18,525	$17,366	1159	7723	577723
6/30/2021	$18,525	$17,332	1193	6530	576530
12/31/2021	$18,525	$17,296	1229	5301	575301
6/30/2022	$18,525	$17,259	1266	4035	574035
12/31/2022	$18,525	$17,221	1304	2731	572731
6/30/2023	$18,525	$17,182	1343	1388	571388
12/31/2023	$18,525	$17,137	1388	0	570000
Total	$1,85,250	$1,73,091	$12,159

Solution 3:

Date	Account title	Debit	Credit
30-Jun-19	Bond Interest Expense Dr	17465
	Premium on Bond	1060
	Cash		18525
31-Dec-19	Bond Interest Expense Dr	17433
	Premium on Bond	1092
	Cash		18525