Question

c her 31. mature in 2027(10 wars For bonds of similar risk and sued 12 bonds dated January 1, 2018, with a paid semially on June 30 and December 31. Problem - On January 1, 2018, Marta Emerprises issued 12m race amount of $20 m maturity, the market yield is OS20 million. The boods mature in 2027 (10 years). For bonds list is paid semamaally on un Required: 1. Determine the price of the bonds Janoary 1, 2018 Prepare the journal entry to record the bond issuance by Marta on January 1, 2018 3. Prepare the journal entry to record interest on June 30, 2018, using the effective interest method. 4. Prepare the first five (5) lines of the amortization table for the bond payable. Carrying Value Amortization Interest Expense Date Interest Paid 1/1/18 6/30/18 12/31/18 6/30/19 12/31/19

Answer 1

Ans 1 Face Value Stated Rate Coupon Payment Market Rate Maturity Period $2,00,00,000 12.00% Semi-annually 10.00% 10 Coupon payment frequency Coupon Rate consider for calculation Coupon Payment Market Rate Consider for Calculation 6.00% (12%/2] $12,00,000 [$20000000 x 6%] 5.00% (10%/2] 20 (10 x 2] Period Present Value of Coupon Payments Present Value of Annuity of $1 Present Value of Coupon Payments (A) 12.46221 $1,49,54,652 ($1200000 x 12.46221] Present Value of Maturity Value Present Value of $1 Present Value of Maturity Value (B) 0.37689 $75,37,800 [$20000000 x 0.37689) Present Value of Bond = Present Value of Coupon Payment + Present Value of Maturity Value Present Value of Bond [(A) +(B)] $2,24,92,452 Issue price of the Bond $2,24,92,452

Credit $24,92,452 $2,00,00,000 Journal Entry Date Particulars Debit Ans 2 1-Jan-18 Cash $2,24,92,452 Premium on Bond Payable Bond Payable (To record issue of Bond) 30-Jun-18 Interest Expense $11,24,623 Premium on Bond Payable $75,377 Cash (To Record interest payment and premium amortisation) Ans 3 $12,00,000

Ans 4 The effective interest rate is also called as market rate. It is the investor's yield maturity. When the effective interest rate is higher as compared bond coupon rate then, the bonds were issued at a discount. The Discount is then amortised over the period of bond by using effective interest rate method. Under this method, interest expense is derived by multiplying the bond carrying value with the effective interest rate applicable when the bonds were issued. The difference between the interest expense and actual interest paid is the discount which will be amortised. Amortisation schedule (Effective Interest Method) Date Opening book Balance Interest Paid Interest Expense Carrying Value Amortisation of Bond Premium (D)=(B)-(C) (A) (B) (C)=(A) x 5% 1-Jan-18 30-Jun-18 31-Dec-18 30-Jun-19 31-Dec-19 $2,24,92,452 $2,24,17,075 $2,23,37,929 $2,22,54,825 $12,00,000 $12,00,000 $12,00,000 $12,00,000 $11,24,623 $11,20,854 $11,16,896 $11,12,741 $75,377 $79,146 $83,104 $87,259 (A)+(C)-(B) $2,24,92,452 $2,24,17,075 $2,23,37,929 $2,22,54,825 $2,21,67,566