Question

I. On January 1, Year 2017, Kennard Co. issued $2,000,000, 5%, 10-year bonds, with interest payable on June 30 and December 31 when the market rate of interest for similar bonds was 6%. Use the following format and round figures to nearest dollar.

1. Actual proceeds received from the issuance of the bonds

2. Prepare an amortization schedule for Year 1 and Year 2 using the effective interest rate method.

Date    Cash Paid    Interest Expense Amortization    Bond Carry Value

3. Show how this bond would be reported on the balance sheet at December 31, Year 2.

Answer 1

Solution

Kennard Co

1. Determination of actual proceeds received from the issuance of the bonds:

Present value of bond + present value of interest payments

Present value of bond –

Face value = $2,000,000

Period, n = 10 x 2 = 20

Market rate of interest = 6%, semi-annual periods, effective interest = 6%/2 = 3%

Present value of bonds = 2,000,000 x (P/F, 3%, 20)

= 2,000,000 x (0.5537) = $1,107,400

Present value of interest = semi-annual interest x (P/A, 3%, 20)

Semi-annual interest = 2,000,000 x 5% x 6/12 = $50,000

Present value of interest = 50,000 x 14.877 = $743,850

Actual proceeds received from bond issue = 1,107,400 + 743,850 = $1,851,250

The bonds are issued at discount, Discount on Bonds Payable = 2,000,000 – 1,851,250 = $148,750

1. Amortization Schedule for Year 1 and Year 2 using effective interest rate method:

	Date	Cash Paid	Interest Expense	Discount Amortization	Bond Carrying Value
Year 1	1-Jan				$1,851,250
	30-Jun	$50,000	$55,538	$5,538	$1,856,788
	31-Dec	$50,000	$55,704	$5,704	$1,862,492
Year 2	30-Jun	$50,000	$55,875	$5,875	$1,868,367
	31-Dec	$50,000	$56,051	$6,051	$1,874,418

1. Reporting Bonds Payable on balance sheet at Dec 31, Year 2:

Kennard Co
Balance Sheet (Partial)
At Dec 31, Year 2
Long-Term Liabilities
Bonds Payable	$2,000,000
Less: unamortized discount on bonds payable	$125,582	$1,874,418

Unamortized discount on bonds payable =discount on bonds payable – amortized discount

= 148,750 – (5,538 + 5,704+ 5,875 + 6,051) = $125,582