Question

A company issued the following semi-annual bonds:

      Face amount:   $150,000

      Coupon rate:     6 %

      Yield:                   4 %

      Life:                   15 years

a. Compute the selling price of the bonds.

2. Prepare the journal entry for the issuance of the bonds using the selling price from part (a).

                                              

c. Prepare the amortization schedule for only the first two interest periods using the interest

     method.

    CASH                  INTEREST EXPENSE                   AMORTIZATION                        BOOK VALUE

d. Prepare the journal entry to record the first interest payment on the bonds using the

     schedule completed in part (c).

                           

Answer 1

(a)-The selling price of the bond

· The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.

· The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.

· Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figures
Par Value/Face Value of the Bond [$150,000]	FV	150,000
Coupon Amount [$150,000 x 6.00% x ½]	PMT	4,500
Market Interest Rate or Yield to maturity on the Bond [4.00% x ½]	1/Y	2
Maturity Period/Time to Maturity [15 Years x 2]	N	30
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond will be $183,595.

“Hence, the Selling price of the Bond will be $183,565”

(b)-The journal entry for the issuance of the bonds

Accounts Tittles and explanations	Debit ($)	Credit ($)
Cash A/c	183,595
To Premium on Bond Payable A/c		33,595
To Bond Payable A/c		150,000
[Journal entry to record the issuance of Bond]

(c)-The amortization schedule for the first two interest periods using the interest

The Bond amortization schedule using effective interest method

Semi-annual period	Cash ($)	Interest expenses ($)	Amortization ($)	Book Value ($)
0				1,83,595
1	4,500	3,672	828	1,82,767
2	4,500	3,655	845	1,81,922

Cash interest paid = Face Value x Annual Coupon rate x ½

Bond Interest Expense = Previous Carrying value x Annual market rate x ½

Premium amortization = Cash paid - Bond interest expense

Bond Book Value = Previous period book value - Premium amortization

(d)-The journal entry to record the first interest payment on the Bond

Accounts Tittles and explanations	Debit ($)	Credit ($)
Interest Expenses A/c	3,672
Premium on Bond Payable A/c	828
To Cash A/c		4,500
[Being the Journal entry passed to record interest payment]

Cash Paid = $4,500 [$150,000 x 6.00% x ½]

Interest Expense = $3,672 [$183,595 x 4.00% x ½]

Premium on Bond Payable amortization = 828 [$4,500 - $3,672]