Question

Refer to the bond details in Problem10-2A, except assume that the bonds are issued at a price of $4,895,980.

Required

1. Prepare the January 1, 2017, journal entry to record the bonds’ issuance.
2. For each semiannual period, compute (a) the cash payment, (b) the straight-line premium amortization, and (c) the bond interest expense.
3. Determine the total bond interest expense to be recognized over the bonds’ life.
4. Prepare the first two years of an amortization table like Exhibit 10.11 using the straight-line method.
5. Prepare the journal entries to record the first two interest payments.

Short answer

1. The premium on bonds payable is$895,980
2. The cash payment for the semi-annual period is$120,000, straight-line premium amortization is$29,866and bond interest expense is$90,134.
3. The total bond interest expense is$2,704,020
4. The carrying value of the bond at the end of the second year is$4,776,516
5. The bond interest expense recognized is$90,134

Step-by-step solution

Meaning of Bond

The bond is the written promise to pay the bond’s par (or face) value and interest at a stated contract rate. It often issued in denomination of $1,000.

(1) Journal entry to record the bonds’ issuance

Date	Account and explanation	Debit ($)	Credit ($)
Jan 01, 2017	Cash	4,895,980
	Bonds Payable		4,000,000
	Premium on bonds payable		895,980
	(To record bonds issued at premium)

(2) Calculation of the Cash payment, the straight-line discount amortization, and the bond interest expense

(a)Computation of the cash payment for each semi-annual period

$\begin{array}{c}\mathbf{C}\mathbf{a}\mathbf{s}\mathbf{h}\mathbf{p}\mathbf{a}\mathbf{y}\mathbf{m}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{=}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000}\mathbf{\times }\frac{\mathbf{6}}{\mathbf{100}}\mathbf{\times }\frac{\mathbf{1}}{\mathbf{2}}\\ \mathbf{=}\mathbf{\$}\mathbf{120}\mathbf{,}\mathbf{000}\end{array}$

(b) Computation of straight-line premium amortization

$\begin{array}{c}\mathbf{P}\mathbf{r}\mathbf{e}\mathbf{m}\mathbf{i}\mathbf{u}\mathbf{m}\mathbf{}\mathbf{a}\mathbf{m}\mathbf{o}\mathbf{r}\mathbf{t}\mathbf{i}\mathbf{z}\mathbf{e}\mathbf{d}\mathbf{}\mathbf{=}\frac{\mathbf{P}\mathbf{r}\mathbf{e}\mathbf{m}\mathbf{i}\mathbf{u}\mathbf{m}}{\mathbf{N}\mathbf{u}\mathbf{m}\mathbf{b}\mathbf{e}\mathbf{r}\mathbf{}\mathbf{o}\mathbf{f}\mathbf{}\mathbf{p}\mathbf{e}\mathbf{r}\mathbf{i}\mathbf{o}\mathbf{d}\mathbf{s}}\\ \mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{895}\mathbf{,}\mathbf{980}}{\mathbf{30}}\\ \mathbf{=}\mathbf{\$}\mathbf{29}\mathbf{,}\mathbf{866}\end{array}$

(c) Computation of bond interest expense for each period

$\begin{array}{c}\mathbf{B}\mathbf{o}\mathbf{n}\mathbf{d}\mathbf{s}\mathbf{i}\mathbf{n}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{e}\mathbf{s}\mathbf{t}\mathbf{e}\mathbf{x}\mathbf{p}\mathbf{e}\mathbf{n}\mathbf{s}\mathbf{e}\mathbf{=}\mathbf{c}\mathbf{a}\mathbf{s}\mathbf{h}\mathbf{p}\mathbf{a}\mathbf{y}\mathbf{m}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{-}\mathbf{P}\mathbf{r}\mathbf{e}\mathbf{m}\mathbf{i}\mathbf{u}\mathbf{m}\mathbf{a}\mathbf{m}\mathbf{o}\mathbf{r}\mathbf{t}\mathbf{i}\mathbf{z}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{n}\mathbf{a}\mathbf{m}\mathbf{o}\mathbf{u}\mathbf{n}\mathbf{t}\\ \mathbf{=}\mathbf{\$}\mathbf{120}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{29}\mathbf{,}\mathbf{866}\\ \mathbf{=}\mathbf{\$}\mathbf{90}\mathbf{,}\mathbf{134}\\ \end{array}$

Computation of total bond interest expense

Particulars	Amount ($)
Thirty Payments of $120,0000	$3,600,000
Less: Premium	$895,980
Total bond interest expense	$2,704,020

Amortization table

	Semi-annual period end	Unamortized premium	Carrying value
0	01-01-2017	$895,980	$4,895,980
1	30-06-2017	$866,114	$4,866,114
2	31-12-2017	$836,248	$4,836,248
3	30-06-2018	$806,382	$4,806,382
4	31-12-2018	$776,516	$4,776,516

Journal entry to record first two interest payment

Date	Account and explanation	Debit ($)	Credit ($)
June 30,2017	Bond Interest expense	90,134
	Premium on bonds payable	29,866
	Cash		120,000
	(To pay semi-annual interest and record amortization)
Dec 31,2017	Bond Interest expense	90,134
	Premium on bonds payable	29,866
	Cash		1,20,000
	(To pay semi-annual interest and record amortization)