Question

On November 1, 2018, Natalia Corporation issued $200,000 8% four year bonds, where interest is payable semi-annually on April 30 and October 31. The bonds were dated November 1, 2018 and mature on November 1, 2022. The accounting period ends on December 31. The market rate on date of issue was 10%.

1. Calculate the proceeds of the bond (price) on November 1, 2018.

2. Prepare a full amortization schedule using the effective-interest method of amortization, starting your schedule at November 1, 2018.

3. Provide all Journal entries required for the years 2018 and 2019, starting with the Bond issue on November 1, 2018. (HINT: Prepare entries for the initial issue, for the semi-annual interest payments and for the year end accruals.)

4. Assuming that on March 1, 2020 that 40% of the bonds are called in at a price of 104. Record the journal entries on March 1, 2020 to pay off the interest to these bondholders and to record the purchase. 5. What is the balance of the Bonds Payable on March 2, 2020 after the 40% bonds were repurchased? Show calculations

Answer 1

	Period	Cashflows	PV @5%
	1	$8,000	$7,619
	2	$8,000	$7,256
	3	$8,000	$6,911
	4	$8,000	$6,582
	5	$8,000	$6,268
	6	$8,000	$5,970
	7	$8,000	$5,685
	8	$208,000	$140,783
			$187,074
1	Proceeds of the bond issue = $187,074
2	Amortization schedule
		Opening bal.	Cash payment	Interest expense	Closing balance	Discount amortization	Balance in amortization
	01-Nov-18	$187,074	-	$0	$187,074		$12,926
	30-Apr-19	$187,074	$8,000	$9,354	$188,428	$1,354.00	$11,572
	31-Oct-19	$188,428	$8,000	$9,421	$189,849	$1,421.00	$10,151
	30-Apr-20	$189,849	$8,000	$9,492	$191,341	$1,492.00	$8,659
	31-Oct-20	$191,341	$8,000	$9,567	$192,908	$1,567.00	$7,092
	30-Apr-21	$192,908	$8,000	$9,645	$194,553	$1,645.00	$5,447
	31-Oct-21	$194,553	$8,000	$9,728	$196,281	$1,728.00	$3,719
	30-Apr-22	$196,281	$8,000	$9,814	$198,095	$1,814.00	$1,905
	31-Oct-22	$198,095	$208,000	$9,905	$0	$1,905.00	$0
Date	Account titles and explanation			Debit	Credit
01-Nov-18	Cash			$187,074
	Discount on bonds payable			$12,926
	Bonds payable				$200,000
	(bond issued at discount)
31-Dec-18	Interest expense			$3,118		(9354/6*2)
	Interest payable				$2,667	(8000/6*2)
	Discount on bonds payable				$451	(1354/6*2)
	(Interest accured at year end)
30-Apr-19	Interest expense			$6,236		(9354*4/6)
	Interest payable			$2,667		(opening bal. of ledger)
	Discount on bonds payable				$903	(1354*4/6)
	Cash				$8,000	(payment)
	(Interest paid on due date)
31-Oct-19	Interest expense			$9,421		(from the table)
	Discount on bonds payable				$1,421	(from the table)
	Cash				$8,000	(from the table)
	(Interest paid recognised)
31-Dec-19	Interest expense			$3,164		(9492*40%*2/6)
	Interest payable				$2,667	(8000/6*2)
	Discount on bonds payable				$497	(bal. fig)
	(Interest accured at year end)
01-Mar-20	Interest expense			$1,266		(9292*2/6)*40%
	Interest payable			$1,067		(2667*40%)
	Disount on bond payable				$334
	Cash				$2,667	(8000/6*5)*40%
	(Interest on 40% bonds paid)
01-Mar-20	Bonds payable			$80,000		(200,000*40%)
	Discount on bond payable			$3,528		(10,151-497)*40%-334
	Gain on redeemption of bonds				$328	(bal. fig)
	Cash				$83,200	(80,000/100*104)
	(redeemption of bonds)
	Carrying amount of bonds after 40% as on 02march 20				(189849*60%)
					$113,909