Question

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Ike issues $100,000 of 13%, three-year bonds dated January 1, 2017, that pay interest semiannually on June 30 and December 31. They are issued at $102,462. Their market rate is 12% at the issue date.

Required:

1. Prepare the January 1, 2017, journal entry to record the bonds' issuance.

2. Complete the below table to calculate the total bond interest expense to be recognized over the bonds' life.

3. Prepare an effective interest amortization table for the bonds' first two years

4. Prepare the journal entries to record the first two interest payments.

5. Prepare the journal entry to record the bonds' retirement on January 1, 2019, at 98.

Answer 1

The Bonds are issued at premium, the premium amount is $2,462($102,462-$100,000) which will be amortised over 3 years
Period	Bonds Payable, Net(Op.Bal)	Interest Expense(@6% on Closing value of Bonds payable)	Cash Paid(@6.5% on Face value of $100,000)	Premium Amortization amount	Unamortized amount	Bonds Payable, Net(Cl.Bal)
01-Jan-17					2,462	1,02,462
30-Jun-17	1,02,462	6,148	6,500	352	2,110	1,02,110
31-Dec-17	1,02,110	6,127	6,500	373	1,736	1,01,736
30-Jun-18	1,01,736	6,104	6,500	396	1,340	1,01,340
31-Dec-18	1,01,340	6,080	6,500	420	921	1,00,921
30-Jun-19	1,00,921	6,055	6,500	445	476	1,00,476
31-Dec-19	1,00,476	6,029	6,500	471	-	1,00,000
	Date	Accounts and explanation	Debit(in $)	Credit(in $)
	01-Jan-17	Cash	$102,462
		Premium on issue of Bond		$2,462
		Bonds payable		$100,000
		(To Bond issued at premium)
	30-Jun-17	Interest Expenses	$6,148
		Premium on issue of Bond	$352
		Cash		$6,500
		(Premium on Bond amortized for 1st period)
	31-Dec-17	Interest Expenses	$6,127
		Premium on issue of Bond	$373
		Cash		$6,500
		(Premium on Bond amortized for 2nd period)
	01-Jan-19	Bonds Payable	$100,000
		Loss on retirement of Bonds	$2,921
		Cash		$98,000
		Discounts on Bonds		$4,921
		(Bonds retired at discount)
		Note:Loss on retirement of Bonds =Carrying value on date of retirement - Repurchase price
		Loss on retirement of Bonds =$100,921 - $98,000 =$2,921