Question

III. Bonds Payable issue and amortization

      Carson Company issued $1,000,000 of corporate bonds on January 1, 2016. The bonds have a stated rate of 4 percent, and a 10 year life. The bonds were issued to yield 3 percent. The bonds pay interest annually, each December 31, starting December 31, 2016.

           

1. Calculate the issue price of the bonds at 1/1/16. Show your assumptions for your calculations.
2. Prepare an amortization schedule for the bonds through December 31, 2017.
3. Prepare the following journal entries:

1. Issue of the bonds on January 1, 2016.
2. Payment of interest (and related amortization) on December 31, 2016.
3. Early retirement of the bonds on December 31, 2017, for 101 (101 percent of face value) after the second interest payment.

     

4. Refer back to the information in Part III. Assume that Carson’s year end financial statement date is March 31, 2016.

1. Prepare the adjusting journal entry at March 31, 2016, to record the accrual of interest and related amortization.
2. Prepare the journal entry to pay the first interest payment on December 31, assuming reversing journal entries were posted at the beginning of the new year (April 1, 2016).

C. Prepare the journal entry to pay the first interest payment on December 31, assuming NO reversing journal entries were posted at the beginning of the new year (April 1, 2016).

Answer 1

A	Issue price of the bond
Period	Transactions	Amount	PV factor at 3%	Discounted amount
1   -- 10	Annual Coupon at 4% of $ 1,000,000	40,000	8.5302	341,208
10	Maturity of $ 1,000,000	1,000,000	0.7441	744,100
	Issue price of the bond			1,085,308

B	Amortization Schedule
	Date	Beginning book value	Annual coupon rate 4%	Yield 3%	Amortized Premium	Carrying value
	{1}	{2}	{3 } = $ 1000,000 x 4%	{4} = {2 } x 3%	{5} = {3) - {4}	{6} = {2}-{5}
	1-Jan-16					1,085,308.00
	31-Dec-16	1,085,308.00	40,000.00	32,559.24	7,440.76	1,077,867.24
	31-Dec-17	1,077,867.24	40,000.00	32,336.02	7,663.98	1,070,203.26
	31-Dec-18	1,070,203.26	40,000.00	32,106.10	7,893.90	1,062,309.35
	31-Dec-19	1,062,309.35	40,000.00	31,869.28	8,130.72	1,054,178.64
	31-Dec-20	1,054,178.64	40,000.00	31,625.36	8,374.64	1,045,803.99
	31-Dec-21	1,045,803.99	40,000.00	31,374.12	8,625.88	1,037,178.11
	31-Dec-22	1,037,178.11	40,000.00	31,115.34	8,884.66	1,028,293.46
	31-Dec-23	1,028,293.46	40,000.00	30,848.80	9,151.20	1,019,142.26
	31-Dec-24	1,019,142.26	40,000.00	30,574.27	9,425.73	1,009,716.53
	31-Dec-25	1,009,716.53	40,000.00	30,291.50	9,708.50	1,000,008.03

C	Journal entries
Date	Account's tittle	Debit $	Credit $
Jan1,2016	Cash	1,085,308
	Bond Payable		1,000,000
	Bond Premium		85,308
	(To record issue of bond , face value $ 1,000,000 issued for $ 1,085,308 at 4% rate)
Dec 31,2016	Interest expenses	32,559.24
	Amortization of Bond premium	7,440.76
	Interest Payable		40,000
	( To record interest expenses and amortization for the year 2016 )
Dec 31,2016	Interest Payable	40,000
	Cash		40,000
	( To record payment of interest)
IV
Mar 31,2016	Interest expenses ( $ 32,559.24 x 3/12 )	8,139.81
	Amortization of Bond premium ( $ 7,440.76 x 3/12 )	1,860.19
	Interest accrued but not due ( $ 40,000 x 3/12)		10,000
	( To record interest expenses and amortization accrued till March 31, 2016 )
Dec 31,2016	Interest expenses ( $ 32,559.24 x 9/12 )	24,419.43
	Amortization of Bond premium ( $ 7,440.76 x 9/12 )	5,580.57
	Interest accrued but not due	10,000
	Interest Payable		40,000
	( To record total interest due )
Dec 31,2016	Interest Payable	40,000
	Cash		40,000
	( To record interest payment )