Question

Question 3: (20 points)

On January 1, 2023, Manson Corporation issued $3-million 10-year bonds. The bonds pay semi-annual interest on July 1 and January 1, and Manson has a December 31, year-end. Presented below is a partial amortization table:

Semi Annual Interest Period	Interest payment	Interest expense	Amortization	Bond Amortized Cost
Jan 1, 2023				[1]
July 1, 2023	$75,000	[2]	$10,095	3,235,177
Jan 1, 2024	[3]	64,704	10,296	3,224,881
July 1, 2024	75,000	64,498	10,502	3,214,379
Jan 1, 2024	75,000	64,288	[4]	[5]
July 1, 2024	75,000	64,073	10,927	3,192,740
Jan 1, 2025	75,000	63,855	11,145	3,181,595

Required:

Set up a table in MS Excel with all relevant information. Use the table to answer the following questions in MS Excel. Use Excel formulas to support your calculation whenever possible

1. Were the bonds issued at a discount or premium? How do you know?
2. What is the face value of the bonds?
3. What is the contractual rate of interest?
4. Calculate the missing amounts for items [1] through [5] in the amortization table
5. What was the market interest rate when the bonds were issued?
6. Prepare the journal entry to record the issue the bonds on January 1, 2023
7. Prepare the journal entry to record the first interest payment on July 1, 2023
8. Prepare the journal entry to record the accrual of interest on December 31, 2023
1. What amounts would be reported as current and as noncurrent liabilities on Manson’s December 31, 2023 balance sheet?

Answer 1

First of all we have to determine the Interest rate at which the Bond is issued and the market interest rate
The Bond interest rate will be on face value of $3 million.So Bond Interest =$75,000 / $3,000,000 =0.025 or 2.50%(Semi-annual).So the Annual Interest rate is 5%
Now from the amortization table it is clear that the Bond is issued at premium as the bond amortized cost is decreasing.
So the Market interest rate =$64,704 / $3,235,177 =2.00%(Semi-annual).So the annual interest rate is 4%
Issue price of Bond =$3,235,177 + $10,095 =$3,245,272
Amortization table
Date	Interest Payment	Interest expenses	Premium amorrtization	Bond carrying amount
01-Jan-23				32,45,272
01-Jul-23	75,000	64,905	10,095	32,35,177
01-Jan-24	75,000	64,704	10,296	32,24,881
01-Jul-24	75,000	64,498	10,502	32,14,379
01-Jan-25	75,000	64,288	10,712	32,03,666
01-Jul-25	75,000	64,073	10,927	31,92,740
01-Jan-26	75,000	63,855	11,145	31,81,594
	Date	Accounts and explanation	Debit(in $)	Credit(in $)
	01-Jan-23	Cash	32,45,272
		Bonds Payable		30,00,000
		Premium on Bonds Payable		2,45,272
		(To Bond issued at premium)
	01-Jul-23	Interest Expenses	$64,905
		Premium on issue of Bond	$10,095
		Cash		$75,000
		(Premium on Bond amortized for 1st period)
	31-Dec-23	Interest Expenses	$64,704
		Premium on issue of Bond	$10,296
		Cash		$75,000
		(Premium on Bond amortized for 2nd period)