Question

Ellis issues 6.5%, five-year bonds dated January 1, 2017, with a \(250,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of \)255,333. The annual market rate is 6% on the issue date. Required

1. Calculate the total bond interest expense over the bonds’ life.
2. Prepare a straight-line amortization table like Exhibit 10.11 for the bonds’ life.
3. Prepare the journal entries to record the first two interest payments.

Short answer

1. The total bond interest expense is $75,917
2. The carrying value of the bond at the end ofits life is $2,49,239
3. The bond interest expense recognized is $7,592

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, and it isoften issued in the denomination of $1,000.

(1) Computation of total bond interest expense     

Particulars	Amount ($)
Ten Payments of $8,125$[10\times (\$250,000\times 6.5\%\times \frac{1}{2})]$	$8,1250
Less: Premium $(\$255,333-\$250,000)$	$5,333
Total bond interest expense	$75,917

(2) Amortization table

	Semi-annual period end	Unamortized premium	Carrying value
0	01-01-2017	$5,333	$255,333
1	30-06-2017	$4,800	$254,800
2	31-12-2017	$4,267	$254,267
3	30-06-2018	$3,734	$253,734
4	31-12-2018	$3,201	$253,201
5	30-06-2019	$2,668	$252,668
6	31-12-2019	$2,135	$252,135
7	30-06-2020	$1,602	$251,602
8	31-12-2020	$1,069	$251,069
9	30-06-2021	$536	$249,772
10	31-12-2021	-	$249,239

$\begin{array}{c}Straightlinepremiumamortization=\frac{Premium}{semiannualperiods}\\ =\frac{\$5,333}{10}\\ =\$533approx\end{array}$

Note: Total bond discount of $5,333less accumulated periodic amortization of $533 per semi-annual interest.

Carrying value for each period is calculated by $250,000 plus unamortized premium.

(3) Journal entry to record the first two interest payment

Date	Account and explanation	Debit ($)	Credit ($)
June 30 2017	Bond interest expense	7,592
	Premium on bonds payable	533
	Cash		8,125
	(To record semi-annual interest and amortization)
Dec 31 2017	Bond interest expense	7,592
	Premium on bonds payable	533
	Cash		8,125
	(To record semi-annual interest and amortization)