Question

On January 1, 2000, Audrey Corporation issued $100,000 of 10% coupon rate bonds to yield an effective rate of 12%. Interest is paid semiannually on June 30 and December 31. The bonds mature in five years, i.e., on January 1, 2005. Audrey incurred $10,000 in issuance costs and has a September 30^th fiscal year end.

Required:

1. Prepare the journal entry to record the bond issuance.

2. Prepare the amortization schedule for the entire bond’s life (5 years).

3. Prepare the journal entries that Audrey Corporation would make on:

1. December 31, 2000.

2. June 30, 2001.

3. September 30, 2001.

4. Prepare Audrey’s Statement of Cash Flows for the fiscal year ended September 30, 2001.

5. Assume that on September 30, 2001 Audrey calls the bonds for 97. Prepare the journal entry to record the bond call.

6. Prepare Audrey’s Statement of Cash Flows for the fiscal year ended September 30, 2001 assuming the call took place.

Answer 1

We first record the bond at its present value at the effective rate of 12%

Period	Cash flow	Discount Rate @12%	Present Value
1	5000	0.892857143	4464.29
2	5000	0.797193878	3985.97
3	5000	0.711780248	3558.90
4	5000	0.635518078	3177.59
5	5000	0.567426856	2837.13
6	5000	0.506631121	2533.16
7	5000	0.452349215	2261.75
8	5000	0.403883228	2019.42
9	5000	0.360610025	1803.05
10	105000	0.321973237	33807.19
			60448.44

Thus the journal entry to record issue of bond would be

Particulars	Debit	Credit
Cash	82,639.91
Bond Issue cost	10,000.00
Discount On issue of Bond	7,360.09
Bonds Payable		100,000.00

The amortization schedule of the discount over bond through its life:

Period	Date	Interest to be charged to Profit and Loss statement	Interest amount to be paid	Amortization of discounts	Balance
					92639.91
1	June 30,2000	5558.39	5000.00	558.39	93198.31
2	Dec 31, 2000	5591.90	5000.00	591.90	93790.21
3	June 30,2001	5627.41	5000.00	627.41	94417.62
4	Dec 31, 2001	5665.06	5000.00	665.06	95082.68
5	June 30,2002	5704.96	5000.00	704.96	95787.64
6	Dec 31, 2002	5747.26	5000.00	747.26	96534.89
7	June 30,2003	5792.09	5000.00	792.09	97326.99
8	Dec 31, 2003	5839.62	5000.00	839.62	98166.61
9	June 30,2004	5890.00	5000.00	890.00	99056.60
10	Dec 31, 2004	5943.40	5000.00	943.40	100000.00

Journal Entries for Dec 31, 2000 ; June 30,2001 & September 30, 2001

Date	Particulars	Debit	Credit
Dec 31, 2000	Interest Expenses	2795.95
	Interest Payable	2795.95
	Discount On issue of Bond		591.90
	Interest Paid		5000.00
Dec 31, 2000	Amortization of bond issue cost	50.00
	Bond Issue cost		50.00
June 30, 2001	Interest Expenses	5.627.41
	Discount On issue of Bond		627.41
	Interest Paid		5000.00
June 30, 2001	Amortization of bond issue cost	100.00
	Bond Issue cost		100.00
Sep 30,2001	Interest Expenses	2832.53
	Interest Payable		2832.53
Sep 30, 2001	Amortization of bond issue cost	50.00
	Bond Issue cost		50.00

We are supposed to answer a maximum of 4 sub parts of a Question. I have already answered more than that.