Question

III. Bonds Payable issue and amortization

      Carson Company issued $1,000,000 of corporate bonds on January 1, 2016. The bonds have a stated rate of 4 percent, and a 10 year life. The bonds were issued to yield 3 percent. The bonds pay interest annually, each December 31, starting December 31, 2016.

           

      A. Calculate the issue price of the bonds at 1/1/16. Show your assumptions for your calculations.

      B. Prepare an amortization schedule for the bonds through December 31, 2017.

      C. Prepare the following journal entries:

            1. Issue of the bonds on January 1, 2016.

            2. Payment of interest (and related amortization) on December 31, 2016.

            3. Early retirement of the bonds on December 31, 2017, for 101 (101 percent of face value) after the second interest payment.

III. Bonds Payable

      A. Issue price of the bonds (show work or assumptions):

      B. Amortization schedule through 12/31/17:

                                    Cash               Int. Exp.             Amort                     Balance

            1/1/16                                                                                                 _________

            12/31/16        ________      ________         ________               _________

            12/31/17        ________      ________         ________               _________

       C. Journal entries

            1. Entry for issue on 1/1/16:

            2. Entry for payment of interest on 12/31/16:

            3. Entry for early retirement on 12/31/17:

Answer 1

A; ISSUE PRICE OF THE BOND= $ 1085300 (see note below)

Note:

Stated interest =4% , Life of the bond=10 years(Interest is paid annually)

Face Value of the Bond=$1000,000

Coupon Interest= 4%($1000,000)=$ 40,000

Table Values are based on
N=10
I=4%
Cash Flow	Amount	Present Value
Interest	$ 40,000	$ 341208 (8.5302*$40,000)
Principal	$1000,000	$ 744100 (0.7441* $1000000)
Price of the bonds	$ 1085300

B :Amortization Schedule Through 12/31/17:

Date	Cash	Interest Expense	Amortization	Balance
1/1/16				$   85300
12/31/16	$ 40000	$ 31470	$   8530	$    76770
12/31/17	$ 40000	$ 31470	$   8530	$    68240

C:

S.no	Date	Particulars	Debit	Credit
1	January 1,2016	Cash	$1085300
	(Issue of Bonds)	Bonds Payable		$1000000
		Premium on issue of bonds		$   85300
2	December 31,2018	Bond Interest Expense	$ 31470
	(Interest Payment)	Premium on Bonds Payable	$   8530
		Cash		$ 40000
3	December 31,2017	Bond Interest Expense	$ 31470
	(Interest Payment	Premium on Bonds Payable	$   8530
		Cash		$ 40000
4	December 31,2017	Bonds Payable	$ 1000000
	(Early retirement of bonds)	Premium on Bonds	$     68240
		Cash		$1010000
		Gain on retirement of bonds		$   58240