Question

Carter Company sells $500,000 of 10% bonds on November 1, 2018. The bonds yield 12% and pay interest on May 1 and November 1. The bonds are due on May 1, 2022. Bond premium interest or discount is amortized using the effective interest method, and is recorded in financial statements at interest dates and year-end. The year-end for Carter Company is December 31.

Required:

1. Calculate the price of the bonds on the issuance date.
2. Create an amortization schedule in Excel for the bonds.
3. Prepare all relevant journal entries for this bond issue from the date of issuance through May 2020.

Answer 1

a. Maturity amount of the bonds = $ 500,000

Semi-annual coupons = $ 500,000 x 10 % x 1/2 = $ 25,000.

n = 7

i = 12 % x 1/2 = 6 %

PVA _{6 %, n=7} = [ { 1 - ( 1 / 1.06 ) ⁷ } / 0.06 ] = 5.5824

PV _{6 %, n = 7} = ( 1 / 1.06 ) ⁷ = 0.6651

Price of the bonds = 25,000 x 5.5824 + 500,000 x 0.6651 = 139,560 + 332,550 = $ 472,110

b. Amortization Table:

Date	Amount Paid	Interest Expense	Discount Amortization	Unamortized Discount	Carrying Value of Bonds
Nov 1, 2018				$ 27,890	$ 472,110
May 1, 2019	$ 25,000	$ 28,326.60	$ 3,326.60	24,563.40	475,436.60
Nov 1, 2019	25,000	28,526.20	3,526.20	21,037.20	478,962.80
May 1, 2020	25,000	28,737.77	3,737.77	17,299.43	482,700.57
Nov 1, 2020	25,000	28,962.03	3,962.03	13,337.40	486,662.60
May 1, 2021	25,000	29,199.76	4,199.76	9,137.64	490,862.36
Nov 1, 2021	25,000	29,451.74	4,451.74	4,685.90	495,314.10
May 1, 2022	25,000	29,685.90	4,685.90	0	500,000

c. In the books of Carter Com[pany :

Date	Account Titles	Debit	Credit
		$	$
Nov 1, 2018	Cash	472,110
	Discount on Bonds Payable	27,890
	Bonds Payable		500,000
May 1, 2019	Interest Expense	28,326.60
	Discount on Bonds Payable		3,326.60
	Cash		25,000
Nov 1, 2019	Interest Expense	28,526.20
	Discount on Bonds Payable		3,526.20
	Cash		25,000
Dec 31, 2019	Interest Expense	9,579.25
	Discount on Bonds Payable		1,245.92
	Interest Payable		8,333.33
May 1, 2020	Interest Expense	19,158.52
	Interest Payable	8,333.33
	Discount on Bonds Payable		2,491.85
	Cash		25,000