Question
In: Accounting
Sabby Inc. issued a $1 million bond at 10% for 5 years to finance a project....
Sabby Inc. issued a $1 million bond at 10% for 5 years to finance a project. The bonds were issued on January 1, 2014. The bond pays interest annually on January 1. The bonds are priced to yield 8%. The PV tables can be used to calculate present values. The company used effective interest method.
Required:
- Calculate the proceeds (price) that Sabby would receive for the bond on January I, 201•t.
- Prepare a bond amortization schedule up to and including January 1, 2018, using the
effective interest method.
- prepare the journal entries to record the initial sale of the bond on January 1 , 2014 and the accrual on December 31, 2014.
- Assume that on July 1, 2017, Sabby decides to retire 35% of the bonds for $780,000
1. Prepare the journal entry to pay out the interest to investors at July 1, 2017 due to the bond retirement
2. Prepare the journal entry for the bond retirement on July 1, 2017 (3› marks)
Solutions
Expert Solution
The issue price of the bond has to be fixed in such a manner that the bond gives to its investors an annual yield of 8%
| Computation of Proceeds that shabby inc would receive on 01.04.2014 from bond issue | |||
| Year | Cashflow | PV Factor @8% | Discounted cash Flow |
| 1 | 100000 | 0.925925926 | 92593 |
| 2 | 100000 | 0.85733882 | 85734 |
| 3 | 100000 | 0.793832241 | 79383 |
| 4 | 100000 | 0.735029853 | 73503 |
| 5 | 1100000 | 0.680583197 | 748642 |
| Issue price of the Bond | $ 10,79,854 |
Amortization Table upto 1st Jan 2019.
| Yr | Opening Balance | Int Exp (To be Debited) | Int Paid (To be Credited) | Closing Balance |
| 01.01.2015 | 1079854 | 86388 | 100000 | 1066242 |
| 01.01.2016 | 1066242 | 85299 | 100000 | 1051542 |
| 01.01.2017 | 1051542 | 84123 | 100000 | 1035665 |
| 01.01.2018 | 1035665 | 82853 | 100000 | 1018518 |
| 01.01.2019 | 1018518 | 81481 | 100000 | 1000000 |
On 01.01.2019, the bond will be redeemed by distributing 1000000 to bond holders.
Journal Entries
| Date | Account Debited | Account Credited | Amount | Narration |
| 01.01.2014 | Bank A/c | 10% Bond Liability A/c | 10,79,854 | Being proceeds received from Bond Sale |
| 31.12.2014 | Interest Exp A/c | 10% Bond Liability A/c | 86388 | Being Interest expense accounted using EIR Method |
| 31.12.2014 | 10% Bond Liability A/c | Interest Payable A/c | 1,00,000 | Being Interst for the year 2014 to be payable on 1st dy of the upcoming year. |
Journal Entry for Interest Payment to 35% of the investors as on 01.07.2017:
| Date | Account Debited | Amount | Account Credited | Amount | Narration |
| 01.07.2017 | Interest Expense | 14499* | 10% Bond Liability A/c | 14499 | Being Int expense for the retirement portion of the bond for 6 months accounted |
| 01.07.2017 | 10% Bond Liability A/c | 17500** | Bank A/c | 17500 | Being Int for the half year (i.e) upto 1st July 2017 paid |
| 01.07.2017 | 10% Bond Liability A/c | 350000 | Bank A/c | 780000 | Being 35% of the bond redeemed at premium |
| Premium on redemption of Bond | 430000 |
* 82853(int Exp for 2017)*35%*6/12
**1,00,000*35%*6/12
Assumed that Redemption amount of 7,80,000 doesnot include interst for the period 1st Jan 2017 to 1st July 2017.
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