Question

4. Bonds Issued between Interest Dates

D Company planned on Issuing bonds $2000,000 on January 1, 2018 but due to slowdowns

the bonds were not sold until April 1, 2018. These 8 year bonds pay 6% interest annually

each December 31st and were sold to yield 5.5%.

Prepare and amortization table for these bonds and the entry to record their issuance and the

first payment on December 31, 2018.

Answer 1

	Calculation of present value of bond
	Annual interest payments (A)	$120,000
	Annuity factor @5.5% for 8 years (B)	6.3346
	Present value of interest payments (C=A*B)	$760,152
	Bond repayment after 8 years (D)	$2,000,000
	P.V factor for 5.5% at 8 years (E)	0.6516
	Present value of bond repayment value (F=D*E)	$1,303,200
	Total present value of future payments (G=C+F)	$2,063,352
Year	A	Interest @ 6% (B)	Effective interest (C=A*5.5%)	Discount amortization (D)	Bond value (E=A-D)
1	$2,063,352	$120,000	$113,484.36	$6,515.64	$2,056,836
2	$2,056,836.36	$120,000	$113,126.00	$6,874.00	$2,049,962
3	$2,049,962.36	$120,000	$112,747.93	$7,252.07	$2,042,710
4	$2,042,710.29	$120,000	$112,349.07	$7,650.93	$2,035,059
5	$2,035,059.36	$120,000	$111,928.26	$8,071.74	$2,026,988
6	$2,026,987.62	$120,000	$111,484.32	$8,515.68	$2,018,472
7	$2,018,471.94	$120,000	$111,015.96	$8,984.04	$2,009,488
8	$2,009,487.90	$120,000	$110,521.83	$9,478.17	$2,000,010
Date	Journal entry	Debit	Credit
31-Dec	Interest expense ($2,000,000*6%*9/12)	$90,000
	Interest payable ($2,000,000*6%*3/12)	$30,000
	Cash		$120,000