Question

On 1/1/A, we issue $100k in 7% bonds due in 4 years with interest payable each 12/31. Suppose the bonds are issued to yield a.) 8%, b.) 5%. Provide valuations, amortization schedules, and entries.

explanation appreciated

Answer 1

a) If Yield 8%

Interest payment = $100,000 x 7% = $7,000

Present value of the interest payments	$23,185
[$7,000 x 3.31213 present value annuity factor (8%, 4 Years)]
Present value of the face value	$73,503
[$100,000 x 0.73503 present value factor (8%, 4 Years)]
Cash received	$96,688

Amortization Schedule:

Date	Cash Paid	Interest Expense	Discount Amortization	Carrying amount of Bonds
1/1/Y1				$96,688
12/31/Y1	$7,000	$7,735	$735	$97,423
12/31/Y2	$7,000	$7,794	$794	$98,217
12/31/Y3	$7,000	$7,857	$857	$99,074
12/31/Y4	$7,000	$7,926	$926	$100,000
	$28,000	$31,312	$3,312

Cash paid = interest payment

Interest expense = Preceding carrying amount x 8%

Discount amortization = Interest expense - Cash paid

Carrying amount = Preceding carrying amount + Discount amortized

Journal Entries:

Date	Account title and explanation	Debit	Credit
1/1/Y1	Cash	$96,688
	Discount on bonds payable	$3,312
	Bonds payable		$100,000
	[To record issuance of bonds]
12/31/Y1	Interest expense	$7,735
	Discount on bonds payable	$735
	Cash		$7,000
	[To record interest payment]
12/31/Y2	Interest expense	$7,794
	Discount on bonds payable	$794
	Cash		$7,000
	[To record interest payment]
12/31/Y3	Interest expense	$7,857
	Discount on bonds payable	$857
	Cash		$7,000
	[To record interest payment]
12/31/Y4	Interest expense	$7,926
	Discount on bonds payable	$926
	Cash		$7,000
	[To record interest payment]
12/31/Y4	Bonds payable	$100,000
	Cash		$100,000
	[To record redemption of bonds]

b) Yield 5%:

Interest payment = $100,000 x 7% = $7,000

Present value of the interest payments	$24,822
[$7,000 x 3.54595 present value annuity factor (8%, 4 Years)]
Present value of the face value	$82,270
[$100,000 x 0.82270 present value factor (8%, 4 Years)]
Cash received	$107,092

Amortization Schedule:

Date	Cash Paid	Interest Expense	Premium Amortization	Carrying amount of Bonds
1/1/Y1				$107,092
12/31/Y1	$7,000	$5,355	$1,645	$105,447
12/31/Y2	$7,000	$5,272	$1,728	$103,719
12/31/Y3	$7,000	$5,186	$1,814	$101,905
12/31/Y4	$7,000	$5,095	$1,905	$100,000
	$28,000	$20,908	$7,092

Cash paid = Interest payment

Interest expense = Preceding carrying amount x 5%

Premium amortization = Cash paid -Interest expense

Carrying amount = Preceding carrying amount - Premium amortization

Journal Entries:

Date	Account title and explanation	Debit	Credit
1/1/Y1	Cash	$107,092
	Bonds payable		$100,000
	Premium on bonds payable		$7,092
	[To record issuance of bonds]
12/31/Y1	Interest expense	$5,355
	Premium on bonds payable	$1,645
	Cash		$7,000
	[To record interest payment]
12/31/Y2	Interest expense	$5,272
	Premium on bonds payable	$1,728
	Cash		$7,000
	[To record interest payment]
12/31/Y3	Interest expense	$5,186
	Premium on bonds payable	$1,814
	Cash		$7,000
	[To record interest payment]
12/31/Y4	Interest expense	$5,095
	Premium on bonds payable	$1,905
	Cash		$7,000
	[To record interest payment]
	Bonds payable	$100,000
	Cash		$100,000
	[To record redemption of bonds]