Question

Problem 10-9AB Effective Interest: Amortization of bond premium; computing bond price LO P1, P6

Ellis issues 8.0%, five-year bonds dated January 1, 2018, with a $430,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $466,682. 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.)

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.

Prepare an effective interest amortization table for the bonds' life. Semiannual Interest Cash Interest Bond Interest Period-End Paid Expense Premium Amortization Unamortizede Carrying Value Premium 01/01/2018 06/30/2018 12/31/2018 06/30/2019 12/31/2019 06/30/2020 12/31/2020 06/30/2021 12/31/2021 06/30/2022 12/31/2022 Total < Required 1 Required 3 >

Answer 1

Face Value of Bonds = $430,000
Issue Value of Bonds = $466,682

Premium on Bonds = Issue Value of Bonds - Face Value of Bonds
Premium on Bonds = $466,682 - $430,000
Premium on Bonds = $36,682

Annual Coupon Rate = 8.00%
Semiannual Coupon Rate = 4.00%
Semiannual Coupon = 4.00% * $430,000
Semiannual Coupon = $17,200

Annual Interest Rate = 6.00%
Semiannual Interest Rate = 3.00%

Requirement 1:

Total bond interest expense over life of bonds: Amount repaid: 10 payments of 17200 Par value at maturity Total repaid Less: amount borrowed Total bond interest expense 172000 430000 60 2000 466682 135318

Requirement 2:

Semiannual Cash Interest | Bond Interest | Premium Unamortized Carrying Period End Paid Expense Amortized | Premium Value 01/01/2018 $ 36,682 $ 466,682 06/30/2018 $ 17,200 $ 14,000$ 3,200 $ 33,482 $ 463,482 12/31/2018 $ 17,200 $ 13,904$ 3,296 $ 30,186 $ 460,186 06/30/2019 $ 17,200 $ 13,806$ 3,394 $ 26,792 $ 456,792 12/31/2019 $ 17,200 $ 13,704$ 3,496 $ 23,296 $ 453,296 06/30/2020 $ 17,200 $ 13,599 $ 12/31/2020 $ 17,200 $ 13,491 $ 3,709 $ 15,986 $ 445,986 06/30/2021 $ 17,200 $ 13,380 $ 3,820 $ 12,166 $ 442,166 12/31/2021 $ 17,200 $ 13,265$ 3,935 $ 8,231 $ 438,231 06/30/2022 $ 17,200 $ 13,147$ 4,053 $ 4,178 $ 434,178 12/31/2022 $ 17,200 $ 13,022 $ 4,178 $ - $ 430,000 Total $ 172,000 $ 135,318 $ 36,682

Requirement 3:

Debit Credit Date June 30, 2018 14,000 3,200 General Journal Interest Expense Premium on Bonds Payable Cash Interest Expense Premium on Bonds Payable Cash 17,200 Dec. 31, 2018 13,904 3,296 17,200

Requirement 4:

Time to Maturity = 2 years
Semiannual Period = 4

Present Value of Face Amount = $430,000 * PV of $1 (3.00%, 4)
Present Value of Face Amount = $430,000 * 0.88849
Present Value of Face Amount = $382,051

Present Value of Semiannual Interest Payments = $17,200 * PVA of $1 (3.00%, 4)
Present Value of Semiannual Interest Payments = $17,200 * 3.71710
Present Value of Semiannual Interest Payments = $63,935

Price Received for the Bonds = Present Value of Face Amount + Present Value of Semiannual Interest Payments
Price Received for the Bonds = $382,051 + $63,935
Price Received for the Bonds = $445,986