Question

On January 1, Hemi Corporation issued $500,000 of 15-year, 10% bonds for $586,460 yielding an effective interest rate(yield to maturity) of 8%. 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 15 years of the bonds' life.

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

Answer 1

	Bond characterstics				Amount
1)	Principal				500,000
	interest				25,000
	Market interest rate				4%
	periods to maturity				30
	issue price				586,460
	principal		*	PV of $1 at 4% for 30 yrs =
	500,000		*	0.30832		=	154160
	interest		*	PV of ordinary annuity at 4%=
	25000		*	17.29203		=	432300
	bond issue price						586460
2)	Amortization Schedule
	Date	cash intt	inttt exp	premium	Carrying
				amortized	value
	1/1/				586,460
	30-Jun	25,000	23458	1542	584918
	31-Dec	25,000	23397	1603	583315
	30-Jun	25,000	23333	1667	581648
	31-Dec	25,000	23266	1734	579914
	30-Jun	25,000	23197	1803	578110
	31-Dec	25,000	23124	1876	576235
	30-Jun	25,000	23049	1951	574284
	31-Dec	25,000	22971	2029	572255
	30-Jun	25,000	22890	2110	570146
	31-Dec	25,000	22806	2194	567951
	30-Jun	25,000	22718	2282	565669
	31-Dec	25,000	22627	2373	563296
	30-Jun	25,000	22532	2468	560828
	31-Dec	25,000	22433	2567	558261
	30-Jun	25,000	22330	2670	555592
	31-Dec	25,000	22224	2776	552815
	30-Jun	25,000	22113	2887	549928
	31-Dec	25,000	21997	3003	546925
	30-Jun	25,000	21877	3123	543802
	31-Dec	25,000	21752	3248	540554
	30-Jun	25,000	21622	3378	537176
	31-Dec	25,000	21487	3513	533663
	30-Jun	25,000	21347	3653	530010
	31-Dec	25,000	21200	3800	526210
	30-Jun	25,000	21048	3952	522259
	31-Dec	25,000	20890	4110	518149
	30-Jun	25,000	20726	4274	513875
	31-Dec	25,000	20555	4445	509430
	30-Jun	25,000	20377	4623	504807
	31-Dec	25,000	20193	4807	500000
3)	Date	Account titles & Explanations				Debit	Credit
	1-Jan	Cash				586,460
		Premium on bonds payable					86,460
		Bonds payable					500,000
	30-Jun	interest expense				23458
		premium on bonds payable				1542
		cash					25,000
	31-Dec	interest expense				23397
		premium on bonds payable				1603
		cash					25,000