Question

Application Problem 10-5A a, c-d Sawada Insurance Ltd. issues bonds with a face value of $100 million that mature in 12 years. The bonds carry a 6.9% interest rate and are sold at 112.18 to yield 5.5%. They pay interest semi-annually. Calculate the proceeds on issuance of the bonds, and show the journal entry to record the issuance. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter o for the amounts.) Proceeds on Issuance of the Bonds Account Titles and Explanation Debit Credit LINK TO TEXT Will the carrying value of the liability for these bonds increase over time, or decrease? The carrying value of the liability for these bonds will over time. LINK TO TEXT Show the journal entries to record the first two interest payments on these bonds. Ignore year-end accruals of interest. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter o for the amounts. Round answers to o decimal places, e.g. 125.) Account Titles and Explanation Debit Credit (To record first interest payment)

Answer 1

Ans 1 Proceeds from issue of bonds (in millions) $112,180,000 Ans 2 Journal entry for issuance of bond Account Title Debit Credit Cash $112.180,000 Premium on Bond Payable $12,180,000 Bond Payable $100,000,000 Ans 3 The carrying value of the liability of these bond will decrease over time as the bond were isuued at premium Ans 4 Account Title Debit Credit Interest Expense [Note(i)] $3,084,950 Premium on Bond Payable $365,050 Cash $3,450,000 (To Record interest payment and amortisation) Interest Expense [Note(i)] $3,074,911 Premium on Bond Payable $375,089 Cash $3,450,000 (To Record interest payment and amortisation) Note (i) The effective interest rate is also called as market rate. It is the investor's yield maturity. When the effective interest rate is higher/Lower as compared bond coupon rate then, the bonds were issued at a discount/premium. The Discount/Premium is then amortised over the period of bond by using effective interest rate method. Under this method, interest expense is derived by multiplying the bond carrying value with the effective interest rate applicable when the bonds were issued. The difference between the interest expense and actual interest paid is the discount/premium which will be amortised. Amortisation schedule (Effective Interest Method) Opening book Closing Book Interest Payment Interest Expense Amortisation of Bond Premium Balance Value (B) = $100000000 x Computation (A) (C) Computation (D)= (B)-(C) (A)+(C)-(B) 6.9%/2 (A) x 5.5%/2 $112,180,000 1st Payment $112,180,000 $3,450,000 ($112180000 x(5.50%/2)] $3,084,950 ($3450000-$3084950) $365,050 $111,814,950 2nd Payment $111,814,950 $3,450,000 ($111814950 x(5.50%/2)] $3,074,911 ($3450000-$3074911] $375,089 $111,439,861