Question

Below is a portion of the amortization table related to the issuance of 20-year bonds from Zeroz Company (YOU DO NOT NEED TO COMPLETE THE TABLE). The bonds were issued on January 1, 2004. The bonds pay interest twice a year on July 1 and January 1. The expiration date is January 1, 2024. At the time of issuance, the company did not incur any incidental cost (assume that the issuance costs were zero). The company closes books on December 31 of each year.

Number of Payments	Date	Cash Paid	Interest Expense	Amortization	Value in Books
-	1/1/04 = issue				?
1	06/30/04	?	?	?	?
.	.	.	.	.	.
.	.	.	.	.	.
.	.	.	.	.	.
39	06/30/23	?	?	9,246	?
40	12/31/23	?	?	9,615	1,000,000
	TOTALS	1,200,000	1,397,928	197,928

REQUIRED: Based on the information provided:

a. Indicate the principal (maturity value) of the bonds.
b. Determine the issuance price of the bonds on January 1, 2004.
c. What amortization method is the company using? Explain briefly how you determined
d. Determine the established semi-annual or coupon interest rate (coupon or stated interest rate).
e. Determine the book value of the bond (book value or carrying amount) that will be reported in the Statement of Financial Position for the period ending June 30, 2023.
f. Determine the semi-annual market interest rate as of 1/1/04 when the bonds were issued (effective interest rate).
g. Determine the balance of the Current Share of the Long Term Debt (Current Maturity of Long-Term Debt) that will be reported in the Statement of Financial Position for the period ending December 31, 2022.
h. Determine the interest expense that will be reported in the Statement of Income and Expenses for the year ending December 31, 2023.
i. Make the necessary journal entries as of 12/31/23 and 1/1/24.

Answer 1

a. Maturity value of the bonds : $ 1,000,000.

b. Issuance price of the bonds : $ 1,000,000 - $ 197,928 = $ 802,072.

c. Amortization method : Effective Interest Rate Method.

If the straight line method was being used, the amount of amortization would have been the same each period. But it is increasing from $ 9,246 to $ 9,615 from the 39th to the 40th period.

d. Semi-annual Coupon Rate = 3 %

Coupon interest amount = $ 1,200,000 / 40 = $ 30,000.

Coupon interest rate per period = $ 30,000 / $ 1,000,000 = 3 %

e. Carrying value of the bond as on June 30, 2023 : $ 990,385.

Book value as on June 30, 2023 = $ 1,000,000 - $ 9,615 = $ 990,385.

f. Semi-annual market interest rate = 4 %

Interest expense for the 40th period= $ 30,000 + $ 9,615 = $ 39,615

Effective interest rate = Interest expense / Carrying value, June 30, 2023 = $ 39,615 / $ 990,385 =0.39999

g. Current Portion of Long Term Debt as on December 31, 2022 : $ 0

No portion is maturing during 2023. Therefore, there is no current portion of the bonds payable.

h. Interest expense to be reported in the income statement ended December 31, 2023 = $ 78,861.

( $ 39,615 + $ 39,246 = $ 78,861 )

i. In the books of Zeroz Company:

Date	Account Titles	Debit	Credit
		$	$
12/31/23	Interest Expense	39,615
	Discount on Bonds Payable		9,615
	Interest Payable		30,000
1/1/24	Bonds Payable	1,000,000
	Interest Payable	30,000
	Cash		1,030,000