Question

Houston Co. issues $100 million in bonds on January 1, 2017 to expire in 6 years. Interest is paid semi-annually on June 30 and December 31. The coupon (stated) rate is 6.5% and the market (yield) rate is 6%. Dallas Inc. purchased $1 million of the bonds (face value). Dallas Inc. classifies the bonds as available for sale.

a) Calculate the price and prepare the amortization table the $100 million bonds issued by Houston Co.

b) Prepare the journal entry at issuance for Houston Co.

c) Prepare the two interest expense entries for 2017 for Houston Co.

d) Prepare the amortization table for the $1 million bonds purchased by Dallas Inc.

e) Prepare the journal entry for purchase of the bonds by Dallas Inc. at the issue price.

f) Prepare the two journal entries for the receipt of interest revenue by Dallas Inc.

g) Assuming that the market price of the bonds is 101 on December 31, 2017, prepare the necessary journal for Dallas Inc.

Answer 1

Solution a:

Face value of bond = $100,000,000

Coupon rate = 6.50%, 3.25% semi annual

Market rate of interest = 6%, 3% semiannual

Period of maturity = 6 years

Issue price of bond = Present value of interest and principal discounted at market interest rate

= ($100,000,000*3.25%)*cumulative PV factor at 3% for 12 periods + $100,000,000 * PV factor at 3% for 12th period

= $3,250,000* 9.954004 + $100,000,000*0.70138

= $102,488,501

Bond Amortization Schedule - Houston Co
Period	Cash Paid	Interest Expense	Premium Amortized	Carrying Value
1-Jan-17				$102,488,501
30-Jun-17	$3,250,000	$3,074,655	$175,345	$102,313,156
31-Dec-17	$3,250,000	$3,069,395	$180,605	$102,132,551
30-Jun-18	$3,250,000	$3,063,977	$186,023	$101,946,527
31-Dec-18	$3,250,000	$3,058,396	$191,604	$101,754,923
30-Jun-19	$3,250,000	$3,052,648	$197,352	$101,557,571
31-Dec-19	$3,250,000	$3,046,727	$203,273	$101,354,298
30-Jun-20	$3,250,000	$3,040,629	$209,371	$101,144,927
31-Dec-20	$3,250,000	$3,034,348	$215,652	$100,929,275
30-Jun-21	$3,250,000	$3,027,878	$222,122	$100,707,153
31-Dec-21	$3,250,000	$3,021,215	$228,785	$100,478,367
30-Jun-22	$3,250,000	$3,014,351	$235,649	$100,242,718
31-Dec-22	$3,250,000	$3,007,282	$242,718	$100,000,000

Solution b:

Journal Entries - Houston Co
Date	Particulars	Debit	Credit
1-Jan-17	Cash Dr	$102,488,501.00
	To Bond Payable		$100,000,000.00
	To Premium on bond		$2,488,501.00
	(Being issued of bond recorded)

Solution c:

Journal Entries - Houston Co
Date	Particulars	Debit	Credit
30-Jun-17	Interest Expense Dr	$3,074,655.00
	Premium on bond Dr	$175,345.00
	To Cash		$3,250,000.00
	(Being interest paid on bond and premium amoritzed)
31-Dec-17	Interest Expense Dr	$3,069,395.00
	Premium on bond Dr	$180,605.00
	To Cash		$3,250,000.00
	(Being interest paid on bond and premium amoritzed)

Solution d:

Investment amount of dalal Inc. = $102,488,501 / 100 = $1,024,885

Amortization Table - Dalal Inc.
Period	Cash received	Interest Revenue	Adjustment to fair value	Carrying Value
1-Jan-17				$1,024,885
30-Jun-17	$32,500	$30,747	$1,753	$1,023,132
31-Dec-17	$32,500	$30,694	$1,806	$1,021,325
30-Jun-18	$32,500	$30,640	$1,860	$1,019,465
31-Dec-18	$32,500	$30,584	$1,916	$1,017,549
30-Jun-19	$32,500	$30,526	$1,974	$1,015,576
31-Dec-19	$32,500	$30,467	$2,033	$1,013,543
30-Jun-20	$32,500	$30,406	$2,094	$1,011,449
31-Dec-20	$32,500	$30,343	$2,157	$1,009,293
30-Jun-21	$32,500	$30,279	$2,221	$1,007,072
31-Dec-21	$32,500	$30,212	$2,288	$1,004,784
30-Jun-22	$32,500	$30,144	$2,356	$1,002,427
31-Dec-22	$32,500	$30,073	$2,427	$1,000,000