Questions - Bonds A company issues term bonds totaling $300,000 on January 1, 2014. The bonds...

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Questions - Bonds A company issues term bonds totaling $300,000 on January 1, 2014. The bonds have a coupon rate of 5%, pay i Accounts Debit Credit Date 7/1/2014 12/31/2014 FYI: On 12/31/2014, the interest expense is accrued since the actual payment i

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Answer 1

Answer #1

5%.

Since the Market interest rate equals the coupon rate, the Issue price of the bond is equal to the par price. So,

N = period ie 10*2 = 20

1/y =

PV =5%/2= 2.5%

PMT = 300000*2.5% = 7500

FV = 300,000

Bond Issue price : 300,000

Semi annual interest payment = 7500.

1/1/14	Cash a/c Dr	300000
	To Bonds Payable		300000

1/7/14	Interest expense a/c Dr	7500
	To cash a/c		7500

31/12/14	Interest Expense a/c Dr	7500
	To interest Payable		7500

4%

Since the Market interest rate equals the coupon rate, the Issue price of the bond is @ premium. So,

Issue price pf the bond =>

PV of Interest payments + PV of payment at maturity

ie (300000*5% = 7500) @ 4%/2 = 2% for 10 years*2 = 20 times ( because semi annual interest payments + 300000 * 2% for 20th year.

ie, By using PV table of 2% for 20 years and 20th year, we get

(7500 * 16.35143) + (300000*0.67297) = 324527.15.

So Bond Issue price = 324527.15

Premium = 324527.20 - 300000 = 24527.15

Premium ammortization table:

Instaments	Interest payment (3000005%1/2)	Interest expense (Book Value 4%1/2)	Bond premium amortised	Remaining Bond premium	Closing Book Value
0				24,527.15	324,527.15
1	7,500.00	6,490.54	1,009.46	23,517.69	323,517.69
2	7,500.00	6,470.35	1,029.65	22,488.05	322,488.05
3	7,500.00	6,449.76	1,050.24	21,437.81	321,437.81
4	7,500.00	6,428.76	1,071.24	20,366.56	320,366.56
5	7,500.00	6,407.33	1,092.67	19,273.90	319,273.90
6	7,500.00	6,385.48	1,114.52	18,159.37	318,159.37
7	7,500.00	6,363.19	1,136.81	17,022.56	317,022.56
8	7,500.00	6,340.45	1,159.55	15,863.01	315,863.01
9	7,500.00	6,317.26	1,182.74	14,680.27	314,680.27
10	7,500.00	6,293.61	1,206.39	13,473.88	313,473.88
11	7,500.00	6,269.48	1,230.52	12,243.36	312,243.36
12	7,500.00	6,244.87	1,255.13	10,988.22	310,988.22
13	7,500.00	6,219.76	1,280.24	9,707.99	309,707.99
14	7,500.00	6,194.16	1,305.84	8,402.15	308,402.15
15	7,500.00	6,168.04	1,331.96	7,070.19	307,070.19
16	7,500.00	6,141.40	1,358.60	5,711.59	305,711.59
17	7,500.00	6,114.23	1,385.77	4,325.82	304,325.82
18	7,500.00	6,086.52	1,413.48	2,912.34	302,912.34
19	7,500.00	6,058.25	1,441.75	1,470.59	301,470.59
20	7,500.00	6,029.41	1,470.59	-	300,000.00

Journal Entry:

1/1/14	Cash a/c Dr	324527.15
	To Bonds Payable		300000
	To Bonds Premium		24527.15

1/7/14	Interest expense a/c Dr	6490.54
	Bonds premium (Ammortisation) Dr	1009.46
	To Cash a/c		7500

31/12/14	Interest Expense a/c Dr	6470.35
	Bonds premium a/c Dr	1029.65
	To Interest Payable a/c		7500

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