Question

On January 1, Hemi Corporation issued $350,000 of 9-year, 8% bonds for $309,086 yielding an effective interest rate (yield to maturity) of 10%. Interest is paid-semi-annually on June 30 and December 31.

Required:

1) Show computations to confirm the issue price

2) compute an amortization schedule for the 9 years of the bonds' life.

3) Give journal entries for: (A) bond issuance, (B) the semi-annual interest payment on June 30 of the first year, and (c) the semi0annual interest payment on December 31 of the first year.

Answer 1

	Bond characterstics				Amount
1)	Principal				350,000
	interest				14,000
	Market interest rate				5%
	periods to maturity				18
	issue price				309,086
	principal		*	PV of $1 at 5% for 18 yrs =
	350,000		*	0.41552		=	145432
	interest		*	PV of ordinary annuity at 5%=
	14000		*	11.68959		=	163654
	bond issue price						309086
2)	Amortization Schedule
	Date	cash intt	inttt exp	Discount	Carrying
				amortized	value
	1/1/				309,086
	30-Jun	14,000	15454	1454	310541
	31-Dec	14,000	15527	1527	312068
	30-Jun	14,000	15603	1603	313671
	31-Dec	14,000	15684	1684	315355
	30-Jun	14,000	15768	1768	317122
	31-Dec	14,000	15856	1856	318978
	30-Jun	14,000	15949	1949	320927
	31-Dec	14,000	16046	2046	322974
	30-Jun	14,000	16149	2149	325122
	31-Dec	14,000	16256	2256	327378
	30-Jun	14,000	16369	2369	329747
	31-Dec	14,000	16487	2487	332235
	30-Jun	14,000	16612	2612	334846
	31-Dec	14,000	16742	2742	337589
	30-Jun	14,000	16879	2879	340468
	31-Dec	14,000	17023	3023	343492
	30-Jun	14,000	17175	3175	346666
	31-Dec	14,000	17333	3333	350000
3)	Date	Account titles & Explanations				Debit	Credit
	1-Jan	Cash				309,086
		discount on bonds payable				40,913
		Bonds payable					350,000
	30-Jun	interest expense				15454
		Discount on bonds payable					1454
		cash					14,000
	31-Dec	interest expense				15527
		Discount on bonds payable					1527
		cash					14,000