Question

The Cessna Aircraft Company has outstanding an issue of 4% convertible bonds that mature October 1, 2024. Suppose the bonds are dated October 1, 2016, and pay interest each April 1 and October 1. The bond information is as follows:

1. Maturity (face) value - $100,000
2. Stated interest rate – 4%
3. Interest paid – Semiannually
4. Market interest rate at the time of issuance – 5%

Requirements

2. Assume the bonds are issued at a price of 93.5. Using the straight-line method of amortization for bond discount or premium:
   1. Calculate interest expense on bonds payable for each semiannual interest payment period.

2. Calculate the amount of accrued interest payable on the December 31, 2016, financial statements.

3. Prepare the journal entry required as of December 31, 2016, to accrue interest on the bonds payable.

3. Use Excel to build an amortization table through October 1, 2018. Use the straight-line method.
4. Using the amortization table, record the following transactions:
   1. Issuance of the bonds on October 1, 2016.
   2. Payment of interest and amortization of the bond discount or premium on April 1, 2017.

Answer 1

Solution:

Issue price of the bonds = face value $100,000 * Issued at 93.5%

= $93,500

Here, Issue price is less than face value of bonds, it means the bonds are issued at discount.

Discount of Bonds Payable = $100,000 - $93,500 = $6,500

Semi annual period to maturity = 8 years x 2 = 16

Under straight line method of amortization, the amount of amortization is remain same for each semiannual interest payment.

Semi-annual interest payable = face value $100,000 * Coupon rate 4% *half yearly ½

= $2,000

Semi-annual discount amortization = Total Discount $6,500 / Semi-annual period to maturity 16

= $406.25

Part a –

Interest Expenses on bonds payable for each semiannual interest payment period = Cash Interest $2,000 + Semi-annual amortization of discount on bonds payable $406.25

= $2,406.25

Part b –

The amount of accrued interest payable on the December 31, 2016, financial statements = Cash Interest i.e. $2,000 x for 3 months / 6 months

= $1000

Part c –

Journal Entry to accrue interest on Dec 31, 2016

Date	Account Titles and Explanation	Debit	Credit
Dec.31, 2016	Interest Expense	$1,203.125
	Discount on Bonds Payable (amortization) ($406.25 / 2)		$203.125
	Cash Interest Payable ($2,000 * ½)		$1,000
	(To record semi annual interest payable)

Part d – Amortization table

Schedule of Bond Discount Amortization
Straight Line Method
Date	Cash Paid (Face Value 100,000 * Coupon Interest Rate 4% x 1/2 half yearly)	Interest Expense (Cash Paid + Discount Amortized*)	Discount Amortized*	Carrying Amount of Bonds
10/1/16		$0		$93,500
4/1/17	$2,000	$2,406.25	$406.25	$93,906
10/1/17	$2,000	$2,406.25	$406.25	$94,313
4/1/18	$2,000	$2,406.25	$406.25	$94,719
10/1/18	$2,000	$2,406.25	$406.25	$95,125
4/1/19	$2,000	$2,406.25	$406.25	$95,531
10/1/19	$2,000	$2,406.25	$406.25	$95,938
4/1/20	$2,000	$2,406.25	$406.25	$96,344
10/1/20	$2,000	$2,406.25	$406.25	$96,750
4/1/21	$2,000	$2,406.25	$406.25	$97,156
10/1/21	$2,000	$2,406.25	$406.25	$97,563
4/1/22	$2,000	$2,406.25	$406.25	$97,969
10/1/22	$2,000	$2,406.25	$406.25	$98,375
4/1/23	$2,000	$2,406.25	$406.25	$98,781
10/1/23	$2,000	$2,406.25	$406.25	$99,188
4/1/24	$2,000	$2,406.25	$406.25	$99,594
10/1/24	$2,000	$2,406.25	$406.25	$100,000
	$32,000	$38,500	$6,500

Part e - Issuance of the bonds on October 1, 2016.

Date	Account Titles and Explanation	Debit	Credit
Oct.1, 2016	Cash	$93,500.00
	Discount on Bonds Payable	$6,500
	Bonds Payable		$100,000.00
	(To record issuance of bonds at 93.5)

Part f - Payment of interest and amortization of the bond discount or premium on April 1, 2017

Date	Account Titles and Explanation	Debit	Credit
Apr.1, 2017	Interest Expense	$1,203.13
	Discount on Bonds Payable (amortization)		$203.13
	Cash Interest Payable		$1,000.00
	(To record semi annual interest payable)