Homework Answers
Answer:
Issued on January 1, 2009:
Face value of bond =$1,000,000
Interest payable on June 30 and Dec 31
Effective interest rate for six months = 4%
Coupon rate for six months = 6%
Bond sale value = $1,271,807
Bond Premium = $1,271,807 - $1,000,000 =$271,807
Uses effective interest method to amortize premium or discount
June 30, 2009:
Interest expense = $1,271,807 * 4% = $50,872.28
Cash paid to bond investors = $1,000,000 * 6% = $60,000
Amortization premium = $60,000 - $50,872.28 = 9127.72
Carrying value of bond = $1,271,807 - 9127.72 = $1,262,679.28
December 31, 2009:
Interest expense = $1,262,679.28 * 4% = $50,507.17
Cash paid to bond investors = $1,000,000 * 6% = $60,000
Amortization premium = $60,000 - $50,507.17 = $9,492.83
Carrying value of bond:
Face value = $1,000,000
Premium = $271,807 - 9127.72 - $9,492.83 = $253,186.45
Carrying value = $1,000,000 + $253,186.45 = $1,253,186.45
January 1, 2010:
20% of bonds retired paying $260,000
Carrying value of 20% of bonds = $1,253,186.45 * 20% = $250,637.29
Face value of bond retired = 1,000,000 * 20% = $200,000
Un-amortized premium of bonds retired = $253,186.45 * 20% = $50,637.29
Loss on retirement of bonds = $260,000 - $250,637.29 = $9,362.71
Journal entry to record on January 1, 2010 is:
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