Ellis issues 6.5% five-year bonds dated January 1. 2015, with a $250.000 par val

Question

Ellis issues 6.5% five-year bonds dated January 1. 2015, with a $250.000 par value. The bonds interest on June 30 and December 31 and are issued at a price of $255.333. The annual market 6% on the issue date. Calculate the total bond interest expense over the bonds' life. Prepare a straight-line amortization table like Exhibit 10.11 for the bonds life. Prepare the journal entries to record the first two interest payments. Legacy issues $325,000 of 5%, four-year bonds dated January , 2015, that pay interest semiannually on June 30 and December 31. They are issued at $292,181 and their market rate is 8% at the issue date. Prepare the January l. 2015. journal entry to record the bonds' life. Determine the total bond interest expense to be recognized over the bonds life. Prepare a straight-line amortization table like the one in Exhibit 10.7 for the bonds first two years. Prepare the journal entries to record the first two interest payments. Analysis Component Assume the market rate on January 1. 2015. is 4% instead of 8%. Without proving numbers, describe how this change affects the amounts reported on Legacy's financial statements. On November 1. 2015. Norwood borrows $200,000 cash from a bank by a five-year installment note bearing 8% interest. The note requires equal total payments each year on October 31.

Explanation / Answer

Legacy's Book 1. Journal entry on bond issue with discount Date Account Name Debit Credit 01 January 2015 Cash $                            2,92,181 Discount on Bonds Payable $                               32,819 Bonds payable $     3,25,000 2. Calculation of Bond Interest expense over bond's life A Interest Payable- semi annual $ 3,25,000 x 5% x 6/12 $           8,125 B Add: Discount Amortisation -semi annual $ 32,819 /4 x 6/12 $           4,102 C Interest Expense for 6 months (A) + (B) $        12,227 D Interest expense for the year C x 2 $        24,455 E Interest expense over Bond's life D x 4 $        97,819 3. Straightline amortization of Discount on Bonds Payable for first two years $32,819 01 January 2015 Bond Issued 30 June 2015 Amortisation $4,102 31 December 2015 Amortisation $4,102 $24,614 31 December 2015 Balance 30 June 2016 Amortisation $4,102 31 December 2016 Amortisation $4,102 $16,410 31 December 2016 Balance 4. Journal entry for first two interest payments Date Account Name Debit Credit 30 June 2015 Interest Expense $                               12,227 Discount on Bonds Payable $           4,102 Cash $           8,125 Date Account Name Debit Credit 31 December 2015 Interest Expense $                               12,227 Discount on Bonds Payable $           4,102 Cash $           8,125 Analysis Component 5. If the Market rate is less than the coupon rate, the bond may be traded at a premium to par value instead of at discount to par value. Accordingly, if the bond is traded at premium the interest expense will come down on Legacy's Financial statement due to amortisation of premium on issue of bonds over bond's life.

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.