Question

Ripkin Company issues 9%, five-year bonds dated January 1, 2017, with a \(320,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of \)332,988. Their annual market rate is 8% 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 $131,012.

2. The unamortized premium for all years is $12,988, $11,689, $10,390, $9,091, $7,792, $6,493, $5,194, $3,895, $2,596 and $1,297.

3. Bond interest expense and Premium on bond payable are debited by $13,101 and $1,299, and Cash is credited by $14,400

Step-by-step solution

Meaning of Bond

The bond refers to a written promise to pay the bond's principal amount at the maturity date along with timely interest payments.

Computation of total bond interest expense

Particulars	Amount ($)
Ten Payments of $14,400$\mathbf{[}\mathbf{10}\mathbf{\times }\mathbf{(}\mathbf{\$}\mathbf{320}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{9}\mathbf{\%}\mathbf{\times }\frac{\mathbf{1}}{\mathbf{2}}\mathbf{)}\mathbf{]}$	$1,44,000
Less: Premium	$12,988
Total bond interest expense	$131,012

(2) Amortization table

	Semi-annual period end	Unamortized premium	Carrying value
0	01-01-2017	$12,988	$332,988
1	30-06-2017	$11,689	$331,689
2	31-12-2017	$10,390	$330,390
3	30-06-2018	$9,091	$326,091
4	31-12-2018	$7,792	$327,792
5	01-06-2019	$6,493	$326,493
6	31-12-2019	$5,194	$325,194
7	01-06-2020	$3,895	$323,895
8	31-12-2020	$2,596	$322,596
9	01-06-2021	$1,297	$321,297
10	31-12-2021	-	$320,000

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

Date	Particulars	Debit ($)	Credit ($)
June 30, 2017	Bond interest expense	13,101
	Premium on bonds payable	1,299
	Cash		14,400
	(To pay semi-annual interest and record amortization)
Dec 31, 2017	Bond interest expense	13,101
	Premium on bonds payable	1,299
	Cash		14,400
	(To pay semi-annual interest and record amortization)