# Hillside issues $1,600,000 of 9%, 15-year bonds dated January 1, 2017, that pay interest... ## Question: Hillside issues$1,600,000 of 9%, 15-year bonds dated January 1, 2017, that pay interest semiannually on June 30 and December 31 The bonds are issued at a price of $1,958,394. Required: 1. Prepare January 1, 2017, journal entry to record the bonds' issuance. 2(a) For each semiannual period, complete the table below to calculate the cash payment. 2(b) For each semiannual period, complete the table below to calculate the straight-line premium amortization. 2(c) For each semiannual period, complete the table below to calculate the bond interest expense. 3. Complete the below table to calculate the total bond interest expense to be recognized over the bonds' life. 4. Prepare the first two years of an amortization table using the straight-line method. 5. Prepare the journal entries to record the first two interest payments. ## Bonds: Bonds are long-term debt instruments issued by companies in order to raise capital. Bonds are characterized by their maturity values and interest rates. The bonds' maturity values must be repaid by the bonds' maturity date; and the bonds' interest rates determine the interest to be paid to investors in exchange for lending their money to the company. ## Answer and Explanation: #### 1. Prepare January 1, 2017, journal entry to record the bonds' issuance. Date Account Debit Credit Explanation Jan. 1, 2017 Cash$1,958,394 Record inflow of cash from issuance
Bonds Payable $1,600,000 Record bonds payable at face value Premium on Bonds Payable$358,394 Record amount received in excess of face value ($1,958,394 -$1,600,000)

#### 2(a) For each semiannual period, complete the table below to calculate the cash payment.

Par (Maturity) Value Annual Rate Year Semiannual Cash Interest Payment
$1,600,000 x 9% x 0.5 =$72,000

#### 2(b) For each semiannual period, complete the table below to calculate the straight-line premium amortization.

Bond Price Par (Maturity) Value Premium on Bonds Payable Semiannual Periods Straight-Line Premium Amortization
$1,958,394 -$1,600,000 = $358,394 / 30 =$11,946.47

#### 2(c) For each semiannual period, complete the table below to calculate the bond interest expense.

Semiannual Cash Payment Premium Amortization Bond Interest Expense
$72,000 -$11,946.47 = $60,053.53 #### 3. Complete the below table to calculate the total bond interest expense to be recognized over the bonds' life. Total bond interest expense over life of bonds Amount repaid: 30 payments of$72,000 $2,160,000 Par value at maturity$1,600,000
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Total repaid $3,760,000 Less amount borrowed ($1,958,394)
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Jan 1, 2017 $358,394.00$   1,600,000.00 $1,958,394.00 June 30, 2017$ 72,000.00 $11,946.47$ 60,053.53 $346,447.53$   1,600,000.00 $1,946,447.53 December 31, 2017$ 72,000.00 $11,946.47$ 60,053.53 $334,501.06$   1,600,000.00 $1,934,501.06 June 30, 2018$ 72,000.00 $11,946.47$ 60,053.53 $322,554.59$   1,600,000.00 $1,922,554.59 December 31, 2018$ 72,000.00 $11,946.47$ 60,053.53 $310,608.12$   1,600,000.00 $1,910,608.12 #### 5. Prepare the journal entries to record the first two interest payments. Date Account Debit Credit June 30 Interest Expense$60,053.53
Premium on Bonds Payable $11,946.47 Cash$72,000
Dec. 31 Interest Expense $60,053.53 Premium on Bonds Payable$11,946.47
Cash \$72,000 