Question

Ellis issues $250,000, 6.5%, 5-year bonds dated January 1, 2017. The bonds pay interest semi-annually on June 30 and December 31. The bonds were issued at $255,333.

1. Record the journal entry to issue the bonds on January 1, 2017.

2. a. Record the journal entry to pay the semi-annual interest payment and amortize the premium on June 30, 2017.

b. Record the journal entry to pay the semi-annual interest payment and amortize the premium on Dec. 31, 2017.

3. a. Record the journal entry to pay the semi-annual interest payment and amortize the premium on June 30, 2018.

b. Record the journal entry to pay the semi-annual interest payment and amortize the premium on Dec. 31, 2018.

4. On September 1, 2020, Ellis calls the bonds at 99. Record the journal entry to call the bonds.

5. What is the total interest expense for the bonds for:

a. One full year?

b. The entire five year life of the bond? (if the bond had been held until maturity)

6. What is the carrying value of the bonds on:

a. December 31, 2017?

b. December 31, 2018?

I understand questions 1-3, but i do not understand questions 4-6.

Answer 1

First of all Market interest rate should be 6% in this ques. Since you've understood the questions 1-3 that's why i'm just answering questions 4-6.

4. On 1 September 2020

Bonds Payable (Debit) $ 250000

Premium on Bonds payable (Debit) $1770

Gain on Retirement of debt (Credit) $ 4270

Cash (Credit) $ 247500

5. A) & B) Total interest expenses :

Year	Interest Payment ($)	Interest Expense ($)
2017	16250	15306
2018	16250	15249
2019	16250	15188
2020	16250	15123
2021	16250	15054
Total	81250	75919

6. A) & B) Carrying Value of the bonds as on:

31 December 2017 = $ 254389

31 December 2018 = $ 253388

Thank you