Question

1) Determine the price of a $1 million bond issue under each of the following independent assumptions:

	Maturity	Interest paid	Stated rate	Effective (market) rate
1	10 years	Annually	10%	12%
2	10 years	Semiannually	10%	12%
3	10 years	Semiannually (July 1 and January1)	12%	10%
4	20 years	Semiannually	12%	10%
5	20 years	Semiannually	12%	12%

2) Prepare journal entries to record the issuance for each of the following the above independent assumptions

3) Only for Assumption 1 and 2, prepare an amortization schedule that determines interest at the effective rate.

Answer 1

Part 1					Part 2
Case 1	FV	$        1,000,000			Journal entry:-
	PMT	$            100,000	(1000000 x 10%)		Cash	$      886,995.54
	Rate	12%			Discount on bonds payable	$      113,004.46
	NPER	10			Bonds payable		$ 1,000,000.00
	PV	($886,995.54)			(Being bond issued at discount)
		=PV(12%,10,100000,1000000)
Case 2	FV	$        1,000,000			Journal entry:-
	PMT	$              50,000	(1000000 x 10%/2)		Cash	$      885,300.79
	Rate	6%	(12%/2)		Discount on bonds payable	$      114,699.21
	NPER	20	(10 x 2)		Bonds payable		$ 1,000,000.00
	PV	($885,300.79)			(Being bond issued at discount)
		=PV(6%,20,50000,1000000)
Case 3	FV	$        1,000,000			Journal entry:-
	PMT	$              60,000	(1000000 x 12%/2)		Cash	$ 1,124,622.10
	Rate	5%	(10%/2)		Premium on bonds payable		$      124,622.10
	NPER	20	(10 x 2)		Bonds payable		$ 1,000,000.00
	PV	($1,124,622.10)			(Being bond issued at premium)
		=PV(5%,20,60000,1000000)
Case 4	FV	$        1,000,000			Journal entry:-
	PMT	$              60,000	(1000000 x 12%/2)		Cash	$ 1,171,590.86
	Rate	5%	(10%/2)		Premium on bonds payable		$      171,590.86
	NPER	40	(20 x 2)		Bonds payable		$ 1,000,000.00
	PV	($1,171,590.86)			(Being bond issued at premium)
		=PV(5%,40,60000,1000000)
Case 5	FV	$        1,000,000			Journal entry:-
	PMT	$              60,000	(1000000 x 12%/2)		Cash	$ 1,000,000.00
	Rate	6%	(12%/2)		Bonds payable		$ 1,000,000.00
	NPER	40	(20 x 2)		(Being bond issued at par)
	PV	($1,000,000.00)
		=PV(6%,40,60000,1000000)

Part 3	Period	Interest payment	Interest Expense	Amortization of bonds discount	Carrying Value
Case 1	Start				886995.54
	1	100,000.00	106,439.46	6,439.46	893,435.00
	2	100,000.00	107,212.20	7,212.20	900,647.21
	3	100,000.00	108,077.66	8,077.66	908,724.87
	4	100,000.00	109,046.98	9,046.98	917,771.85
	5	100,000.00	110,132.62	10,132.62	927,904.48
	6	100,000.00	111,348.54	11,348.54	939,253.01
	7	100,000.00	112,710.36	12,710.36	951,963.38
	8	100,000.00	114,235.61	14,235.61	966,198.98
	9	100,000.00	115,943.88	15,943.88	982,142.86
	10	100,000.00	117,857.14	17,857.14	1,000,000.00
	Hint:	100000 = 1000000 x 10%
		106439.46 = 886995.54 x 12%
		6439.46 = 106439.46-100000
		893435 = 886995.54+6439.46
Case 2	Period	Interest payment	Interest Expense	Amortization of bonds discount	Carrying Value
	Start				885300.79
	1	50,000.00	53,118.05	3,118.05	888,418.84
	2	50,000.00	53,305.13	3,305.13	891,723.97
	3	50,000.00	53,503.44	3,503.44	895,227.41
	4	50,000.00	53,713.64	3,713.64	898,941.05
	5	50,000.00	53,936.46	3,936.46	902,877.51
	6	50,000.00	54,172.65	4,172.65	907,050.16
	7	50,000.00	54,423.01	4,423.01	911,473.17
	8	50,000.00	54,688.39	4,688.39	916,161.56
	9	50,000.00	54,969.69	4,969.69	921,131.26
	10	50,000.00	55,267.88	5,267.88	926,399.13
	11	50,000.00	55,583.95	5,583.95	931,983.08
	12	50,000.00	55,918.98	5,918.98	937,902.07
	13	50,000.00	56,274.12	6,274.12	944,176.19
	14	50,000.00	56,650.57	6,650.57	950,826.76
	15	50,000.00	57,049.61	7,049.61	957,876.37
	16	50,000.00	57,472.58	7,472.58	965,348.95
	17	50,000.00	57,920.94	7,920.94	973,269.89
	18	50,000.00	58,396.19	8,396.19	981,666.08
	19	50,000.00	58,899.96	8,899.96	990,566.04
	20	50,000.00	59,433.96	9,433.96	1,000,000.01
	Hint	50000 = 1000000 x 5%
		53118.05 = 885300.79 x 6%
		3118.05 = 53118.05-50000
		888418.84 = 885300.79+3118.05