Question

Question: I. On January 1, Year 2017, Kennard Co. issued $2,000,000, 5%, 10-year bonds, with interest payab...

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

1	Actual proceeds from the issuance of bond=Present value of interest payment for 20 semi-annual payment using market interest rate+Present value of maturity value of bond at the end of bond duration at market interest rate
	Market interest rate=6% per year=3% for 6 months
	Semi-annual payments=10*2=20
	Interest payment for 6 months=2000000*5%*1/2=$ 50000
							$
	Present value of interest						743874
	(50000*PVIAF @ 3% for 20 years=50000*14.87747)
	Present value of principal
	(2000000*PVIF @ 3% for the 20th year=2000000*0.55368)						1107360
	Actual proceeds						1851234
2	Date	Cash paid	Interest expense	Amortization	Bond carry value
		1	2=Previous (1)*3%	3=(2-1)	4=Previous (4)+3
	Jan 1,2017				1851234
	June 30,2017	50000	55537	5537	1856771
			(1851234*3%)		(1851234+5537)
	Dec 31,2017	50000	55703	5703	1862474
	June 30,2018	50000	55874	5874	1868348
	Dec 31,2018	50000	56050	6050	1874399
	Total			23165
3			Balance sheet (Partial)
			as on Dec 31,2018
					$	$
	Long-term liabilities
	Bonds payable				2000000
	Less; Unamortized discount			(Note:1)	125601	1874399
	Note:1
	Unamortized discount=Discount on issue of bonds-Amortized discount till date
	Discount on issue of bonds=Face value of bonds-Actual proceeds=2000000-1851234=$ 148766
	Unamortized discount=148766-23165=$ 125601