Question

ellis company issues 8.0%, five-year bonds dated january 1, 2027, with a $530,000 par value. the bonds pay interest on june 30 and december 31 and are issued at a price of $575,210. the annual market rate is 6% on the issue date. answer is complete but not entirely correct. complete this question by entering your answers in the tabs below. required 1 required 2 required 3 prepare the journal en required 2 e first two interest payments. no date general journal debit credit 1 june 30 bond interest expense 17,256 premium on bonds payable 3,944 cash 21,200 2 december 31 bond interest expense 17,138 premium on bonds payable 4,062 cash 21,200

Explanation:

Step1: Calculate cash payment

Semi-annual cash interest = Par value × $\frac{\text{Stated rate}}{2}$
$\$530,000 \times \frac{8\%}{2} = \$21,200$

Step2: Calculate June 30 interest expense

Interest expense = Carrying value × $\frac{\text{Market rate}}{2}$
$\$575,210 \times \frac{6\%}{2} = \$17,256.30$

Step3: Calculate June 30 premium amortization

Premium amortization = Cash payment - Interest expense
$\$21,200 - \$17,256.30 = \$3,943.70$

Step4: Update carrying value for Dec31

New carrying value = Initial carrying value - Premium amortized
$\$575,210 - \$3,943.70 = \$571,266.30$

Step5: Calculate Dec31 interest expense

Interest expense = Updated carrying value × $\frac{\text{Market rate}}{2}$
$\$571,266.30 \times \frac{6\%}{2} = \$17,137.99$

Step6: Calculate Dec31 premium amortization

Premium amortization = Cash payment - Interest expense
$\$21,200 - \$17,137.99 = \$4,062.01$

Answer:

June 30 Journal Entry:

General Journal	Debit	Credit
Premium on Bonds Payable	$\$3,944$
Cash		$\$21,200$

December 31 Journal Entry:

General Journal	Debit	Credit
Premium on Bonds Payable	$\$4,062$
Cash		$\$21,200$

(Note: The slight differences are due to rounding to whole dollars, which matches the standard accounting practice for this scenario)