Question

On January 1, 2020, Fields Corporation issued ten-year bonds with a par value of $2,000,000. The bonds pay interest semiannually on June 30 and December 31 at an annual rate of 10%. The bonds were issued to yield 8% annually.

Fields Corporation has a fiscal year that ends August 31 each year. Fields Corporation uses the effective-interest method to calculate its interest expense each period.

Required:

1. Compute the issue price of the bonds and the journal entry at issuance.

2. Prepare the bond amortization table through December 31, 2020.

3. Prepare the journal entry or entries associated with this bond on August 31, 2020.

Answer 1

Requirement 1:-

The Issue price of the bonds at Issuance is calculated as follows:-

Table Values are based on
n=	20
i=	4%
Cash Flow	Amount	Table Value	Present Value
Interest payments	100,000	13.59033	1,359,033
Maturity Value	2,000,000	0.45639	912,773.89
Issue Price of the Bonds		2,271,806.89

The journal entry to record the issuance of the bonds :-

Date	Particulars	Debit	Credit
January 1, 2020	Cash A/c Dr.	2,271,807
	Premium on Bonds Payable A/c		271,807
	Bonds Payable A/c		2,000,000
	(To record the issue of bonds at a premium)

Requirement 2:-

Date	Interest Payment(5% Semi annually)	Interest Expenses(4% Semi Annually)	Premium Amortization	Bond Carrying Amount
January 1, 2020				2,271,806.89
June 30, 2020	100,000.00	90,872.28	9,127.72	2,262,679.17
December 31, 2020	100,000.00	90,507.17	9,492.83	2,253,186.33

Requirement 3:-

	Particulars	Debit	Credit
08/31/2020	Interest Expense A/c ($90,507 * 2 months/6 months)	30,169
	Premium on Bonds Payable ($9,493 * 2 months/6 months)	3,164
	To Interest payable A/c(		33,333
	(To record the accrual of interest on bonds)

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