Question

Bond Effective Interest Rate Method of amortization

1. ABC Company sold $1,000,000 of 5% bonds with interest due semi-annually at 103. They are 5 year bonds. This sale occurred January 1, 2019.

a. Provide an amortization schedule using the effective interest rate method for the entire life of the bond.

b. Show the journal entry for the January sale.

c. Show the journal entry for the first interest payment date.

NOTE: A good search term for finding examples is "effective interest rate method example" and "bond issuance price"

Answer 1

A	B	C	D	E	F	G	H
2
3		a)
4		Face Value of the Bond	$1,000,000
5		Bonds issued at	$1,030,000
6		Coupon (Semi-Annual)	5%
7		Semi-Annual coupon payment	$25,000
8		Period (years)	5
9		Number of semiannual Period	10
10		Semi-annual effective interest rate	2.16%	=RATE(D9,D7,-D5,D4)
11
12		Amortization Table
13		Year	Cash Paid (@2.5% of face value)	Interest Expense (@2.16% of BV)	Decrease in carrying value	Carrying Value
14		1/1/2019				$         1,030,000.00
15		6/30/2019	$25,000	$               22,280.58	$                 2,719.42	$         1,027,280.58	=G14-F15
16		1/1/2020	$25,000	$               22,221.75	$                 2,778.25	$         1,024,502.33
17		6/30/2020	$25,000	$               22,161.65	$                 2,838.35	$         1,021,663.99
18		1/1/2021	$25,000	$               22,100.26	$                 2,899.74	$         1,018,764.24
19		6/30/2021	$25,000	$               22,037.53	$                 2,962.47	$         1,015,801.77
20		1/1/2022	$25,000	$               21,973.45	$                 3,026.55	$         1,012,775.22
21		6/30/2022	$25,000	$               21,907.98	$                 3,092.02	$         1,009,683.20
22		1/1/2023	$25,000	$               21,841.09	$                 3,158.91	$         1,006,524.29
23		6/30/2023	$25,000	$               21,772.76	$                 3,227.24	$         1,003,297.05
24		1/1/2024	$25,000	$               21,702.95	$                 3,297.05	$         1,000,000.00
25
26		b)
27		Journal Entry at the time of sale:
28		Date	Journal Entry	Debit	Credit
29		1/1/2019	Cash	$1,030,000
30			Premium on Bonds Payable		$30,000
31			Bonds Payable		$1,000,000
32
33		c)
34		Journal entry for first interest payment:
35		6/30/2019	Interest Expense	$               22,280.58
36			Premium on Bonds Payable	$                 2,719.42
37			Cash		$25,000
38

Formula sheet