Question

Mathieson Co. issues a $18,000,000, 6.5 % bond on 1 October 20X4. At this time, market interest rates are in the range of 6%. The bond had a 10-year life from 1 October 20X4, and paid interest semi-annually on 31 March and 30 September. (PV of $1, PVA of $1, and PVAD of $1.) (Use appropriate factor(s) from the tables provided.) Required: 1. Calculate the proceeds that would be raised on bond issuance. (Round time value factor to 5 decimal places. Do not round intermediate calculations. Round your final answer to the nearest whole dollar amount.) Proceeds from bond issuance ! 2. Prepare an amortization table using the effective interest method of amortization. Complete the first four payments only. (Round time value factor to 5 decimal places. Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.) Period Cash Interest Paid Interest Expense D or P Amortization Closing Net Bond Liab. Op. balance 4 1

Answer 1

Requirement 1:

Interest payment = $18,000,000 x 6.5% x 6/12 = $585,000

Present value of the interest payment	$8,703,320
[$585,000 x 14.87747 present value annuity factor (3%, 20 years)]
Present value of the face value	$9,966,240
[$18,000,000 x 0.55368 present value factor (3%, 20 years)]
Proceeds from Bond issuance	$18,669,560

Requirement 2:

Period	Cash Interest Paid	Interest Expense	Premium Amortization	Closing Net Bond Liab.
Op. balance				$18,669,560
1	$585,000	$560,087	$24,913	$18,644,647
2	$585,000	$559,339	$25,661	$18,618,986
3	$585,000	$558,570	$26,430	$18,592,556
4	$585,000	$557,777	$27,223	$18,565,332

Interest expense = Preceding closing net bond liab. x 6% x 6/12

Premium amortization = Cash interest paid - Interest expense

Closing Net bond liab. = Preceding closing net bond liab. - Premium amortization

Requirement 3:

Date	Account title and explanation	Debit	Credit
1 October 20X4	Cash	$18,669,560
	Bonds payable		$18,000,000
	Premium on bonds payable		$669,560
	[To record issuance of bonds]
31 December 20X4	Interest expense [18,669,560 x 6% x 3/12]	$140,022
	Premium on bonds payable	$152,478
	Interest payable [18,000,000 x 6.5% x 3/12]		$292,500
	[To record accrued interest expense]
31 March 20X5	Interest payable	$292,500
	Interest expense [560,087-292,500]	$267,587
	Premium on bonds payable	$24,913
	Cash		$585,000
	[To record interest payment]
30 September 20X5	Interest expense	$559,339
	Premium on bonds payable	$25,661
	Cash		$585,000
	[To record interest payment]
31 December 20X5	Interest expense [18,644,647 x 6% x 3/12]	$279,670
	Premium on bonds payable	$12,830
	Interest payable [18,000,000 x 6.5% x 3/12]		$292,500
	[To record accrued interest expense]