Question

Canvas Question 7 O pts On January 1, 2016. Ouachita Airlines issued $400,000 of its 20 year, 8% bonds. The bonds were priced to yield 10% (Market Rate). Interest is payable semiannually on June 30 and December 31. Ouachita Airlines records and amortizes interest using the effective interest rate method Required: (18pts) - The question is broken down into 5 sub-questions, provide your answers for each sub- question) All parts of Question 7 will be manually graded - Round all amounts to closest dollar - No decimal places. a. Determine the price of the bonds at January 1, 2016, and show calculations. (Ques 8) 4pts b. Prepare the journal entry to record their issuance. (Quest 9) - 3.5 pts c. Prepare the journal entry to record interest on December 31, 2016 (the second interest payment). (Ques 10) - 3.5 pts d. Now, assume they use the straight line method to amortize discounts or premiums, prepare the journal entry to record interest on December 31, 2016 (the second interest payment). (Ques 11) - 3.5 pts e. Show how the Bonds will be reflected on the Balance sheet after the Interest Payment on Dec 31, 2016 when using the Straight Line method of amortization. (Ques 12) (3.5 pts) BI VAAI EX32 * , E - 2 V 1 12pt - Paragraph -

Answer 1

Ans a Calculation of issue price of bond Face Value Stated Rate Coupon Payment Market Rate Maturity Period Journal Entry Date Ans b Jan 1, 2016 $400,000 8.00% Semiannually 10.00% 20 Account Title Debit Credit Cash $331,365 Discount on Bond Payable $68,635 Bond Payable $400,000 (To record issuance of bond at discount) Interest Expense $16,597 Discount on Bond Payable $597 Cash $16,000 |(To record interest payment and discount amortisation) Ans Dec 31,2016 Coupon payment frequency Coupon Rate consider for calculation Coupon Payment 4.00% [8%/2] $16,000 [$400000 x 4%] 5.00% (10%/2] 40 [20 x 2] Market Rate Consider for Calculation Period Present Value of Coupon Payments Present Value of Annuity of $1 period 40 Present Value of Coupon Payments (A) 17.15909/ $274,545 ($16000 x 17.159091 Amortisation Schedule (Effective Interest) The effective interest rate is also called as market rate. It is the investor's yield maturity. When the effective interest rate is higher/Lower as compared bond coupon rate then, the bonds were issued at a discount/premium. The Discount/Premium is then amortised over the period of bond by using effective interest rate method. Under this method, interest expense is derived by multiplying the bond carrying value with the effective interest rate applicable when the bonds were issued. The difference between the interest expense and actual interest paid is the discount/premium which will be amortised. Amortisation schedule (Effective Interest Method) Cash Payment Amortisation of Closing Book Opening book Balance Interest Expense $400000 x 4%/2 Bond Discount Value (A) (C) =(A) x 5% (D)= (C)-(B) (A)+(C)-(B) Jan 1, 2016 $331,365 Jun 30,2016 $331,365 $16,000 $16,568 $568 $331,933 Dec 31, 2016 $331,933 $16,000 $16,597 $597 $332,530 Date Present Value of Maturity Value Present Value of $1 period 40 Present Value of Maturity Value (B) 0.14205 $56,820 [$400000 x 0.14205] Present Value of Bond = Present Value of Coupon Payment + Present Value of Present Value of Bond [(A) + (B)] $331,365 Issue price of the Bond $331,365

Ans d in straight line amortization, the premium received or discount given on issue of bond is amortized over the bond period maturity on straight line basis. Formula is (Discount / Premium Amount) divided by bond period. Discount ($400000-$332365] Amortisation per period ($68635/40] $68,635 $1,716 Date Dec 31,2016 Account Title Debit Credit Interest Expense $17,716 Discount on Bond Payable Cash (To record interest payment and discount amortisation) $1,716 $16,000 Date Interest Expense Amortisation schedule ( Straight Line Method) Opening book Balance 1 (A) Jan 1, 2016 Jun 30,2016 $331,365 Dec 31, 2016 $333,081 Cash Payment $400000 x 4%/2 (B) Amortisation of Bond Discount (C) | (D)= (B)+(C) Closing Book Value (A)+(D)-(B) $331,365 $333,081 $334,797 $16,000 $16,000 $1,716 $1,716 $17,716 $17,716 Anse Ouachita Airlines Balance Sheet (Partial) Dec 31, 2016 Bond Payable Less: Unamortised Discount on bond payable $400,000 -$65,203 [$68635-$1716-$1716] $334,797