Question

Ellis issues 8.5%, five-year bonds dated January 1, 2017, with a $540,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $597,579. The annual market rate is 6% on the issue date.

1. Complete the below table to calculate the total bond interest expense over the bonds' life.
2. Prepare a straight-line amortization table for the bonds’ life.
3. Prepare the journal entries to record the first two interest payments.

Answer 1

1
Total interest expense over life of bonds
10 payments of $ 22950	229500
Par value at maturity	540000
Total repaid	769500
Less: Amount borrowed	597579
Total bond interest expense	171921
2
Semiannual Interest period end	Unamortized Premium	Carrying value
01/01/2017	57579	597579
06/30/2017	51821	591821
12/31/2017	46063	586063
06/30/2018	40305	580305
12/31/2018	34547	574547
06/30/2019	28789	568789
12/31/2019	23031	563031
06/30/2020	17273	557273
12/31/2020	11515	551515
06/30/2021	5757	545757
12/31/2021	0	540000

3
		Debit	Credit
June 30,2017	Interest expense	17192
	Premium on Bonds payable	5758		=(597579-540000)/10
	Cash		22950	=540000*8.5%/2
		Debit	Credit
December 31,2017	Interest expense	17192
	Premium on Bonds payable	5758		=(597579-540000)/10
	Cash		22950	=540000*8.5%/2