Question 3: (20 points) On January 1, 2023, Manson Corporation issued $3-million 10-year bonds. The bonds...
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
- Were the bonds issued at a discount or premium? How do you know?
- What is the face value of the bonds?
- What is the contractual rate of interest?
- Calculate the missing amounts for items [1] through [5] in the amortization table
- What was the market interest rate when the bonds were issued?
- Prepare the journal entry to record the issue the bonds on January 1, 2023
- Prepare the journal entry to record the first interest payment on July 1, 2023
- Prepare the journal entry to record the accrual of interest on December 31, 2023
- What amounts would be reported as current and as noncurrent liabilities on Manson’s December 31, 2023 balance sheet?
Homework Answers
| 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) | |||||
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