Question

On 2020 03 15 DIOMEDIC Inc. issued $35 m of 10-year, 7.02% bonds, priced to yield 7.15% and callable in the first five years at 100.4. The bonds carried a BBB rating and paid a semiannual coupon. 2023 0315, after paying the coupon, DIOMEDIC refi'd the bonds with a new borrowing that had the same maturity, principal and coupon schedule as the first borrowing. For items #1-4 on your memo, assume that transaction costs were not material. The new bonds were priced to yield 668 bps and carried a 6.75% coupon rate.

Answer 1

1. Journal entry to record 2020-03-15 issuance

Bond Payable amount is calculated considering

The price of a bond issue often differs from its face value. The amount a bond sells for above face value is a premium. The amount a bond sells for below face value is a discount. A difference between face value and issue price exists whenever the market rate of interest for similar bonds differs from the contract rate of interest on the bonds. The effective interest rate (also called the yield) is the minimum rate of interest that investors accept on bonds of a particular risk category. The higher the risk category, the higher the minimum rate of interest that investors accept.

Market Rate = Contract Rate   Bond sells at par (or face or 100%)
Market Rate < Contract Rate   Bonds sells at premium (price greater than 100%)
Market Rate > Contract Rate   Bond sells at discount (price less than 100%)

Financial caclculator FV - 35,000,000 PMT = 35000000*7.02%/2=1,228,500 , N - 20 , I/Y -7.15/2 =3.575

CPT PV - 34,678,851

Date	Particulars	Debit	Credit
Mar-20	Cash	34,678,851
	Discount on Bonds Payable	321,149
	Bonds Payable ($35,000,000 bond amount)		35,000,000

2. Journal entry to record interest accrual 2020.09.15

When a company issues bonds at a premium or discount, the amount of bond interest expense recorded each period differs from bond interest payments. The bond pays interest every 6 months on September 15 and March 15. We will amortize the discount using the straight-line method meaning we will take the total amount of the discount and divide by the total number of interest payments

Date	Particulars	Debit	Credit
2020-09-15	Bond Interest Expense	1,244,557
	Discount on Bonds Payable ($321,149 / 20 interest payments)		16,057
	Cash ($35,000,000 x 7.02% x 6 months / 12 months)		1,228,500

3. What amount will be reported for balance sheet for Bonds

Long-term Liabilities:
Bonds Payable, 7.02% due in 10 years	35,000,000
Less: Discount on Bonds Payable	305,092
Bond Value as on 2020-12-31	34,694,908