Angel Corporation has $10,000,000 of 8.0% 25 year bonds dated May 1, 2018 with interest payable...
Angel Corporation has $10,000,000 of 8.0% 25 year bonds dated May 1, 2018 with interest payable on April 30 and October 31. The corporation’s fiscal year ends on December 31, and it uses the straight line method to amortize bond premiums and discounts.
Assume the bonds are issued at 98.5 on May 1, 2018 Show your work and computations.
- How much cash will be received on the sale?
- How much is recorded as Bond Payable at the time of the sale?
- What is the difference between #1 and #2 referred to and what is the dollar amount?
- With regard to the bond interest payment on October 31, 2018:
- How much cash is paid in interest?
- How much is the bond amortization per period of the premium or discount?
- What is the interest expense for the six months ended October 31, 2018?
- What would be the “carrying value” of the bonds as of April 30, 2019 (one year later)?
Homework Answers
Answer to Requirement 1.
Amount received on sale of Bond = $10,000,000 * 98.50%
Amount received on sale of Bond = $9,850,000
Answer to Requirement 2.
At the time of sale, Bond will increase the liability i.e. Bonds Payable by $10,000,000.
Answer to Requirement 3.
The difference between #1 and #2 is the discount on Bonds Payable $150,000 ($10,000,000 - $9,850,000)
Answer to Requirement 4.
Bond Interest payment on October 31, 2018 = $10,000,000 * 8.0% *
6/12
Bond Interest payment on October 31, 2018 =
$400,000
Answer to Requirement 5.
Discount amortized per period = Discount on Bonds * 1/Life of
Bond * Period
Discount amortized per period = $150,000 * 1/25 * 6/12
Discount amortized per period = $3,000
Answer to Requirement 6.
Interest Expense per period = Interest paid – Discount
amortized
Interest Expense for period ended October 31, 2018 = $400,000 -
$3,000
Interest Expense for period ended October 31, 2018 =
$397,000
Answer to Requirement 7.
Carrying Value of the Bond = Bond issuance price + Discount amortized
Discount amortized in 1 year = $3,000 * 2
Discount amortized in 1 year = $6,000
Carrying Value of the Bond on April 30, 2019 = $9,850,000 +
$6,000
Carrying Value of the Bond on April 30, 2019 =
$9,856,000
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