Question

In this assignment you will be working with bonds. You will compute bond issue price, then make an amortization table. You will then do a few select journal entries using your amortization table.

Here is the data:

• Bond issue principal amount: 800,000
• Semi-annual interest payments at the end of every six months
• Term = 6 years
• Stated rate = 6%
• Interest payment = ?

Scenarios:

1. Market rate = 4%
2. Market rate = 6%
3. Market rate = 8%

Requirements:

For each of the three scenarios, complete a separate tab in Excel. Include the data for your problem in each sheet. Then:

1. Compute the interest payment. It is the same amount in each scenario.
2. Compute bond issue price
3. Create an amortization table using the effective interest method for all 12 payment periods.
4. Below your Effective Interest amortization table show journal entries for:
   1. Bond Issue
   2. First payment (payment at end of period 1)
   3. Payment at the end of the 6^th period.
   4. Settlement of the bond after last payment. Note: do not include the final payment journal entry; only include the entry for the settlement of bon
5. For the instances that have a discount or a premium (scenarios 1 and 3) do the following:
   1. Below your journal entries, create an amortization table using the same bond issue price as you did in step 2 above. Use the straight-line method of amortization for this second table (see chapter 14 appendix).
6. Below your straight-line amortization table show journal entries for:
   1. First payment (payment at end of period 1)
   2. Payment at the end of the 6^th period.

Answer 1

Interest payment=Principal amount*Interest rate for 6 months=800000*6%*(6/12)=$ 24000

Market rate = 4%:

Issue price of the bond=Present value of interest payments+Present value of maturity value at the end

Number of semi-annual periods=6*2=12

Discount rate=Bonds yield for 6 months=4%*(6/12)=2%

Present value of interest payments=Interest payment*PV factor at 2% for 12 years=24000*10.57534=$ 253808

Present value of maturity value at the end=Maturity value*PV factor at 2% for 12th year=800000*0.78849=$ 630792

Issue price of the bond=253808+630792=$ 884600

Premium on issue of bonds=Issue price-Maturity value=884600-800000=$ 84600

	Bond amortization table
Date	Cash paid	Interest expense	Premium amortized	Carrying value of the bond
	a	b	a-b
Beg.				884600
End of 1st period	24000	17692	6308	878292
End of 2nd period	24000	17566	6434	871858
End of 3rd period	24000	17437	6563	865295
End of 4th period	24000	17306	6694	858601
End of 5th period	24000	17172	6828	851773
End of 6th period	24000	17035	6965	844808
End of 7th period	24000	16896	7104	837705
End of 8th period	24000	16754	7246	830459
End of 9th period	24000	16609	7391	823068
End of 10th period	24000	16461	7539	815529
End of 11th period	24000	16311	7689	807840
End of 12th period	24000	16160	7840	800000
Cash paid=Interest payment
Interest expense=Beginning carrying value of the bond*Bonds yield for 6 months (2%)
Carrying value of the bond=Beginning carrying value of the bond-Premium amortized
Journal entry:
Ref.	Account titles				Debit	Credit
a	Cash				884600
	Bonds payable					800000
	Premium on bonds payable					84600
	(Bond Issue)
b.	Interest expense				17692
	Premium on bonds payable				6308
	Cash					24000
	(payment at end of period 1)
c.	Interest expense				17035
	Premium on bonds payable				6965
	Cash					24000
	(Payment at the end of the 6th period)
d.	Interest expense				16160
	Premium on bonds payable				7840
	Cash					24000
	(Payment at the end of the life of bond)
	Bonds payable				800000
	Cash					800000
	(Settlement of the bond)

Market rate = 6% Issue price of the bond+Present value of interest payments+Present value of maturity value at the end Number of semi-annual periods=6*2=12 Discount rate=Bonds yield for 6 months=6%*(6/12)=3% Present value of interest payments=Interest payment*PV factor at 3% for 12 years=24000*9.95400=$ 238896 Present value of maturity value at the end=Maturity value *PV factor at 3% for 12th year=800000*0.70138=$ 561104 Issue price of the bond=238896+561104=$ 800000 Date а Beg. End of 1st period End of 2nd period End of 3rd period End of 4th period End of 5th period End of 6th period End of 7th period End of 8th period End of 9th period End of 10th period Bond amortization table Carrying Interest Premium value of Cash paid expense amortized the bond b a-b 800000 24000 24000 0 800000 24000 24000 0 800000 24000 24000 0 800000 24000 24000 0 800000 24000 24000 0 800000 24000 24000 0 800000 24000 24000 0 800000 24000 0 800000 24000 24000 0 800000 24000 24000 24000 0 800000

24000 24000 0 800000 End of 10th period End of 11th period End of 12th period 0 24000 24000 24000 24000 800000 800000 0 Cash paid=Interest payment Interest expense=Beginning carrying value of the bond*Bonds yield for 6 months (3%) Carrying value of the bond=Beginning carrying value of the bond-Premium amortized Journal entry: Ref. Debit Credit 800000 a 800000 b. 24000 24000 C. Account titles Cash Bonds payable (Bond Issue) Interest expense Cash (payment at end of period 1) Interest expense Cash (Payment at the end of the 6th period) Interest expense Cash (Payment at the end of the life of bond) Bonds payable Cash 24000 24000 d. 24000 24000 800000 800000

800000 Cash (Settlement of the bond) Market rate = 8%: Issue price of the bond=Present value of interest payments+Present value of maturity value at the end Number of semi-annual periods=6*2=12 Discount rate=Bonds yield for 6 months=8%*(6/12)=4% Present value of interest payments=Interest payment*PV factor at 4% for 12 years=24000*9.38507=$ 225242 Present value of maturity value at the end=Maturity value *PV factor at 4% for 12th year=800000*0.6246=$ 499680 Issue price of the bond=225242+499680=$ 724922 Discount on issue of bonds=issue price-Maturity value=800000-724922=$ 75078 Bond amortization table Carrying Interest Discount value of Cash paid expense amortized the bond b Date a b-a 724922 24000 28997 24000 29197 Beg. End of 1st period End of 2nd period End of 3rd period End of 4th period End of 5th period End of 6th period 729919 735116 740520 746141 24000 4997 5197 5405 5621 5846 29405 24000 24000 29621 29846) 30079 7519871 24000 6079 758066

29846 5846 751987 6079 758066 24000 24000 24000 24000 6323 End of 5th period End of 6th period End of 7th period End of 8th period End of 9th period End of 10th period End of 11th period End of 12th period 30079 30323 30576 30839 31112 6576 24000 764389 770964 777803 784915 792312 6839 7112 7397 24000 31397 24000 24000 31688 7688 800000 Cash paid=Interest payment Interest expense=Beginning carrying value of the bond*Bonds yield for 6 months (4%) Carrying value of the bond=Beginning carrying value of the bond+Discount amortized Journal entry: Ref. Credit Debit 724922 a 75078 800000 Account titles Cash Discount on bonds payable Bonds payable (Bond Issue) Interest expense Discount on bonds payable Cash (payment at end of period 1) Interest expense b. 28997 4997 24000 C. 30079

c. 30079 6079 24000 d. 31688 (payment at end of period 1) Interest expense Discount on bonds payable Cash (Payment at the end of the 6th period) Interest expense Discount on bonds payable Cash (Payment at the end of the life of bond) Bonds payable Cash (Settlement of the bond) 7688 24000 800000 800000