Question

The company issues 6% 10-year bonds with a total face amount of $1,000,000 with interest paid semi-annually. The market rate of interest is 6.1%. n % PV PVA 10 | 6.00% - 0.55839 7.3601 10 | 6.10% 0.553157 .3253 20 3.00% 0.55368 14.8775 20 3.05% 0.54833 14.8089 ROUND ANSWERS TO NEAREST DOLLAR 1. What is the issue price of the bond? $. 2. Record the issuance of the bond: 3. What is the interest expense for the first interest payment? $_ 4. What is the bond liability after the first interest payment? $_ 5. What is the interest expense for the second interest payment? $_

Answer 1

Solution Face Value of Bonds $1,000,000 Stated rate of interest 6.00% Market interest rate 6.10% Bond life 10 Years Semi-annual Interest payment frequency 20 Total no. of interest payment till maturity (10 Years x 2) Semi-annual interest payment = $1,000,000 x 6.00 % x 6/12 = $30,000 Required 1.: Computation of issue price of bonds Semi-annual interest payment $30,000 Present value of an ordinary annuity of $1 for 20 periods at 3.05% 14.8089 Present value of Semi-annual interest payments ($30,000 x 14.8089) $444,267 $1,000,000 Face value of bonds to be repaid at the time of maturity Present value of $1 for 20 periods at 3.05% 0.54833 Present value of payment made on maturity ($1,000,000 x 0.54833) $548,330 Issue price of Bonds $992,597 Note: Since, the interest payment is semi-annually, hence the period shall be twice (10 years x 2), and the interest rate shall be half (6.10% / 2 ) to select the present value factor Issue price of the bonds $992,597 Required 2.: Journal entry to record the issuance of the bond General Journal Debit Credit Cash $992,597 Discount on Bonds Payable ($1,000,000 - $992,597) $7,403 $1,000,000 Bonds Payable (To record issuance of bonds) Required 3 Interest expense for the first interest payment To calculate the interest expense, we shall prepare the partial bond discount amortization table, as under Bond Discount Amortization Table (Partial) Effective-Interest Method Carrying Discount Payment Interest Cash paid amount of Number Amortized expense (#) Bonds $992,597 $30,000 $30,000 $992,871 $993,154 $30,274 $274 1. $30,283 $283 2 ##Calculation $30,274 Interest expense for the first interest payment = $992,597 x 6.10%/2 Interest expense for the 2nd interest payment $992,871 x 6.10 %/2 $30,283 Interest expense for the first interest payment $30,274 Required 4.: Bond liability after the first interest payment $1,000,000 ($7,129 Bonds Payable, face value Less: Unamortized discount ($7,403 $274) Bond liability after the first interest payment $992,871 Required 5.: Interest expense for the second interest payment Interest expense for the second interest payment $30,283