Question

(Amount on bond issuance, journal entries, and carrying value)

Haulem Equipment Inc. issued $75 million 20-year bonds to finance the expansion of its school bus manufacturing operations in Winnipeg, Manitoba. The bonds pay 6% interest semi-annually and were issued at 89.322 to yield 7%.

Required:

a.  Calculate the amount of cash Haulem received on issuance of the bonds and prepare the related journal entry.

b.  Prepare the journal entries to record the first two interest payments.

c.  Calculate the carrying value of the bonds one year after issuance (that is, after the second semi-annual payment).

Answer 1

a. Cash received = $75,000,000 / $100 * $89.322 = $66,991,500

Cash	$8,008,500
Bonds discount	$66,991,500
Bonds payable		$75,000,000

b. First interest payment

Interest expense	$4,500,000
Cash ($75,000,000*6%)		$4,500,000

Interest expense	$189,405
Bond discount [($66,991,500*7%) - $4,500,000]		$189,405

Second interest payment

Interest expense	$4,500,000
Cash ($75,000,000*6%)		$4,500,000

Interest expense	$176,147
Bond discount [({$66,991,500-$189,405}*7%) - $4,500,000]		$176,147

c. Carrying value of the bonds after 1 year of issuance = Initial carrying value + Discount amortized

= $66,991,500 + $189,405 + $176,147

= $67,357,052