Question
In: Accounting
On July 1, 2011, Markov Corp. issued $400,000 par value, 10%, 10-year bonds dated July 1,...
On July 1, 2011, Markov Corp. issued $400,000 par value, 10%, 10-year bonds dated July 1, 2011, with interest payable semi-annually on January 1 and July 1. The bonds were issued for $454,361. On January 1, 2013, Markov offered to buy back the bonds for 4 points above the market value of the bond, which was 99 at that date. Forty percent of the bondholders accepted the offer. Markov uses the effective interest method of amortizing premium or discount.
Required
(a) Prepare the journal entry to record the bond issuance.
(b) Prepare the adjusting entry at December 31, 2011, the end of the fiscal year.
(c) Prepare the entry for the interest payment on January 1, 2012.
(d) Record the retirement of the bonds on January 1, 2013.
Show all supporting calculations.
(a)
(b)
(c)
(d)
Solutions
Expert Solution
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| Markov Corp | ||
| Face value of bonds | 400,000.00 | G |
| Issue value | 454,361.00 | H |
| Unamortized premium | 54,361.00 | I=G-H |
| Book value of bonds | 400,000.00 | See G |
| Coupon rate | 10.00% | J |
| Semi annual rate | 5.00% | K=J/2 |
| Semi annual Interest | 20,000.00 | L=G*K |
| Calculation of market rate | PV | PV factor at 4% | |
| Face value of bonds | 400,000.00 | 0.456386946 | 182,554.78 |
| Semi annual Interest | 20,000.00 | 13.59032634 | 271,806.53 |
| Total | 420,000.00 | 454,361.31 |
| Market rate | 8.00% |
| Quarterly Market rate | 4.00% |
| Amortization schedule | A | B | C=A-B | D=D-C | E | F=E-D |
| Date | Interest payment at 5% | Interest expense at 4% | Amortization of bond Premium | Credit balance in bond Premium | Credit balance in bonds payable | Book value of bonds |
| Credit Cash | Debit Interest expense | Credit bond discount | ||||
| July 1 2011 | 54,361.00 | 400,000.00 | 454,361.00 | |||
| Jan 1 2012 | 20,000.00 | 18,174.00 | 1,826.00 | 52,535.00 | 400,000.00 | 452,535.00 |
| July 1 2012 | 20,000.00 | 18,101.00 | 1,899.00 | 50,636.00 | 400,000.00 | 450,636.00 |
| Jan 1 2013 | 20,000.00 | 18,025.00 | 1,975.00 | 48,661.00 | 400,000.00 | 448,661.00 |
| Answer a | Journal entry | ||
| Date | Account | Debit $ | Credit $ |
| July 1 2011 | Cash | 454,361.00 | |
| Premium on Bonds Payable | 54,361.00 | ||
| Bonds Payable | 400,000.00 | ||
| Answer b | |||
| Dec 31 2011 | Interest expense | 18,174.00 | |
| Premium on Bonds Payable | 1,826.00 | ||
| Interest Payable | 20,000.00 | ||
| Answer c | |||
| Jan 1 2012 | Interest Payable | 20,000.00 | |
| Cash | 20,000.00 |
| Answer d | ||
| Workings | Amount $ | |
| Value of bonds payable retired | 160,000.00 | |
| Retired at (103%) | 164,800.00 | |
| Loss on retirement | 4,800.00 | |
| Less Balance in premium on Bonds Payable | 19,464.00 | This is $ 48,661*40%. |
| Gain on redemption of bonds payable | 14,664.00 |
| Journal entry | Debit $ | Credit $ |
| Bonds Payable | 160,000.00 | |
| Premium on Bonds Payable | 19,464.00 | |
| Gain on redemption of bonds payable | 14,664.00 | |
| Cash | 164,800.00 |
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