Ellis issues 6.5%, five- year bonds dated january 1,2015 with a 250,000 par valu

Question

Ellis issues 6.5%, five- year bonds dated january 1,2015 with a 250,000 par value. the bonds pay interest on June 30 and December 31 and are issued at a price of $ 253,333. The annual market rate is 6% on the issue date.

1. Calculate he 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.

book. Financial & Managerial Accounting , sixth Edition.

Explanation / Answer

1. Compute the total bond interest expense over the bonds' life.
When bonds are sold at a premium, you can calculate the total interest expense by subtracting the premium paid on the bond 5,333 from the amount of total payments. The total payments are 250,000 x .065 x 5 = 81,250.
81,250 - 5,333 = 75,917 Total bond interest expense.
2. Prepare a straight line amortization table like Exhibit 10.11 for the bonds life , you have an Actual amount of premium so making the table is easy for you
3. Prepare the journal entries to record the first two interest payments.
Dr Bond Interest Expense 7,656
Dr Amortization of Premium 469
Cr Cash 8,125

Dr Bond Interest Expense 7,646
Dr Amortization of Premium 479
Cr Cash 8,125

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