Question

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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:

  1. Calculate the proceeds (price) that Sabby would receive for the bond on January I, 201•t.
  1. Prepare a bond amortization schedule up to and including January 1, 2018, using the

effective interest method.        

  1. prepare the journal entries to record the initial sale of the bond on January 1 , 2014 and the accrual on December 31, 2014.
  1. 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.

ekkarill92 answered 2 years ago
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