Question

III. Bonds Payable issue and amortization

      Carson Company issued $1,000,000 of corporate bonds on January 1, 2016. The bonds have a stated rate of 4 percent, and a 10 year life. The bonds were issued to yield 3 percent. The bonds pay interest annually, each December 31, starting December 31, 2016.

           

      A. Calculate the issue price of the bonds at 1/1/16. Show your assumptions for your calculations.

      B. Prepare an amortization schedule for the bonds through December 31, 2017.

      C. Prepare the following journal entries:

            1. Issue of the bonds on January 1, 2016.

            2. Payment of interest (and related amortization) on December 31, 2016.

            3. Early retirement of the bonds on December 31, 2017, for 101 (101 percent of face value) after the second interest payment.

Answer 1

Particulars Present Value of Annual interest of $40,000 for 10 Annual years is 40,000* 8.5302 (cumulative factor of 10 periods of 3% Present value of a single payment at the Maturity date 1,000,000*.7441 (Factor at end of 10" period of 3% Issue Price of Bond Amount $ 341,208.00 744,100.00 $1,085,308.00 Unamortized Interest Amortizatio Bond Carrying Value InterestCarrying Value at beginning of Expense to be Period Interest paymentto bondholders Premium end of Period period n of Bond Premium at at end of recorded A" 3% 496 of 1,000,000 -B $ 85,308.00 $1,085,308.00 1,085,308.00$32,559.00$40,000.00$ 7,441.00 $ 77,867.00 $1,077,867.00 1,077,867.00$32,336.00$40,000.00|$ 7,664.00 $ 70,203.00 $1,070,203.00 1,070,203.00$32,106.00$40,000.00|$ 7,894.00 $ 62,309.00 $1,062,309.00 1,062,309.00$31,869.00$40,000.00| $ 8,131.00 $ 54,179.00 $1,054,179.00 1,054,179.00$31,625.00$40,000.00| $ 8,375.00 $ 45,804.00 $1,045,804.00 1,045,804.00$31,374.00$40,000.00| $ 8,626.00 $ 37,178.00 $1,037,178.00 1,037,178.00$31,115.00$40,000.00| $ 8,885.00 $ 28,293.00 $1,028,293.00 1,028,293.00$30,849.00$40,000.00|$ 9,151.00 $ 19,142.00 $1,019,142.00 1,019,142.00$30,574.00$40,000.00|$ 9,426.00$ 9,717.00 $1,009,717.00 1,000,000.00 0 4 9 1,009,717.00$30,291.00$ 40,000.00| $ 9,717.00 |$ Year Particulars 2016 01-Jan Cash S 1,085,308.00 Bond Pavable Unamortized Bond Premium (For 10 year bond issued at premium) S1,000,000.00 S 85,308.00 2016 $ 32,559.00 Unamortized Bond Premium$7,441.00 31-Dec Bond Interest Expense $40,000.00 (For interest on 4% bonds paaid and premium amortized for 2016) Cash (1,000,000*4% 2017 31-Dec Bond Interest Expense 32,336.00 Unamortized Bond Premium$7,664.00 $40,000.00 Cash (1,000,000*4% (For interest on 4% bonds paaid and premium amortized for 2017) 31-Dec Bonds pavable S1,000,000.00 Unamortized Bond premium$70,203.00 Cash (1,000,000*101% Gain on retirement of bond (for bond retired in 2017) $ 1,010,000.00 S 60,203.00