Question

Application Problem 10-4A b-d Spring Water Company Ltd. needed to raise $75 million of additional capital to finance the expansion of its bottled water facility. After consulting an investment banker, it decided to issue bonds. The bonds had a face value of $75 million and an annual interest rate of 4.5%, paid semi-annually on June 30 and December 31, and will reach maturity on December 31, 2030. The bonds were issued at 96.1 on January 1, 2021, for $72,075,000, which represented a yield of 5%. Show the journal entry to record the issuance of the bonds. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter o for the amounts.) Account Titles and Explanation Debit Credit LINK TO TEXT Show the journal entries to record the first two interest payments. Ignore year-end accruals of interest. (Round answers to the nearest whole dollar, e.g. 5,275. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter o for the amounts.) Date Account Titles and Explanation Debit Credit June 30 December 31 LINK TO TEXT What amount will be reported on the statement of financial position at the end of the first year related to these bonds? (Round answers to o decimal places, e.g. 125.) Notes Payables

Answer 1

Issue of bonds

Cash	$7,20,75,000
Bonds payable		$7,20,75,000
(To record issue of bonds)

Jun-30	Interest expense	$ 18,01,875
	Bonds payable		$1,14,375
	Cash		$ 16,87,500
	(To record payment of 1st installment and bond liability)
Dec-31	Interest expense	$18,04,734
	Bonds payable		$ 1,17,234
	Cash		$ 16,87,500
	(To record payment of 2nd installment and bond liability)

Since yield is 5%, interest is calculated @ 5% per annum. Since bonds are semi annual payments, 2.5% should be calculated semi-annually.

Schedule of amortization of bond
Period	Interest @ 2.5%	Interest Cash payment	Increase in bond liability	Closing balance
01-Jan-21				$ 7,20,75,000
30-Jun-21	18,01,875	16,87,500	1,14,375	7,21,89,375
31-Dec-21	18,04,734	16,87,500	1,17,234	7,23,06,609
30-Jun-22	18,07,665	16,87,500	1,20,165	7,24,26,775
31-Dec-22	18,10,669	16,87,500	1,23,169	7,25,49,944
30-Jun-23	18,13,749	16,87,500	1,26,249	7,26,76,193
31-Dec-23	18,16,905	16,87,500	1,29,405	7,28,05,597
30-Jun-24	18,20,140	16,87,500	1,32,640	7,29,38,237
31-Dec-24	18,23,456	16,87,500	1,35,956	7,30,74,193
30-Jun-25	18,26,855	16,87,500	1,39,355	7,32,13,548
31-Dec-25	18,30,339	16,87,500	1,42,839	7,33,56,387
30-Jun-26	18,33,910	16,87,500	1,46,410	7,35,02,796
31-Dec-26	18,37,570	16,87,500	1,50,070	7,36,52,866
30-Jun-27	18,41,322	16,87,500	1,53,822	7,38,06,688
31-Dec-27	18,45,167	16,87,500	1,57,667	7,39,64,355
30-Jun-28	18,49,109	16,87,500	1,61,609	7,41,25,964
31-Dec-28	18,53,149	16,87,500	1,65,649	7,42,91,613
30-Jun-29	18,57,290	16,87,500	1,69,790	7,44,61,404
31-Dec-29	18,61,535	16,87,500	1,74,035	7,46,35,439
30-Jun-30	18,65,886	16,87,500	1,78,386	7,48,13,825
31-Dec-30	18,70,346	16,87,500	1,82,846	7,49,96,670

Closing balance in the bond payable account at the end of year 1 (as per above table )- 7,23,06,609

Bonds payable	$ 7,20,75,000
Add: 30th June increase in liability	$ 1,14,375
Add: 31st Dec increase in liability	$ 1,17,234
	$ 7,23,06,609