Question

On January 1 19X1, Jak Company issued $100,000 of 10% bonds, due December 31, 19X10 (10 years). Interest is t be paid semiannually on June 30 and December 31. At the time the bonds were issued, the internal rate of return was 8%. Instructions: A) Calculate and journalize the proceeds of the bond issue from the perspective of the Long-term ISSUER. Show your work clearly and systematically, labeling all figures and computations. B) Prepare a schedule to calculate interest and amortization of the premium or discount only for the first two years' semiannual periods through 12/31/X2 using the effective interest method, labeling all figures. C) Prepare the entry to call-in or otherwise retire the bonds on January 1, 19x3 @ 101, labeling all figures from the perspective of LONG-TERM INVESTOR.

Answer 1

A. Given that Jak company Issued $100000 of 10% bonds on Jan 1st 1901,

So the Proceeds of the Bond Issue are- $100000

journal entry for the Above proceeds is.

Bank A/c Dr $100000

To Bonds @10% Cr $100000

B. Given that Interest Is to be paid Semi annually on June 30th & Dec 31st @10%

Schedule of Interest payment for the first two years is as follows

Simple Interest Calculation per annaum= Principal*Interest rate per annum

June 30th Dec 31st

1st Year $100000*10%*1/2 =5000 $100000*10%*1/2=5000 2nd Year $100000*10%*1/2=5000 $100000*10%*1/2=5000

Effective Interest Method

Effective Rate of Interest =-1 here n=2*2=4 because we need to pay 4 times

(1 + nominalvalue/n)"

effective rate of Interest ==0.1038

I - (1/10+1)

Effective rate of interest=10.38%

Effective Interest=$100000*10.38%=$5190

Premium Amount paid is=5190-5000=$190

C)

Given that the bonds are call in on Jan  1 1903 @101

Assumed Face value of Bond is= $100

Premium Paid for bonds =100000/100*1=1000

Journal entry for Call in the bonds is

Bonds@10% A/c Dr $100000

Premium on Redemption of Debentures A/c Dr $ 1000

To Bank A/c Cr $101000