Question

On January 1, 2019, The company you work for sold 6% bonds having a maturity value of $1,000,000 and a 3% yield (market rate). The bonds are dated January 1, 2019, and mature January 1, 2024, with interest payable June 30 and December 31 of each year. Your company allocates interest and unamortized discount or premium on the effective-interest basis.

You are trying to explain the cash flow, interest and liability impacts of the bond issue to your CEO on what this bond issue means to the business and financial statements.

As an intern in the Accounting department, it is your responsibility to explain this bond issue to the CEO. Present an amortization schedule that details out the cash flows, interest expense and carrying amount of the bond issue throughout its life.

Prepare an interest amortization schedule in Excel (in good format as you are going to share this with the CEO) for the bond issue detailed above. The amortization schedule should cover the full 5-year bond issue and show the cash impact, interest expense and carrying value of the bond for each period.

For your CEO, you are required to

1. Work out an excel worksheet showing the value of the bond at the date of issuance using the PV function in Excel (make sure to use formulas).
2. Amortization table, in good “deliverable” form for the full life of the bond. Use formulas to calculate each of the values in the amortization table (do not calculate using present value factors and hard-code into Excel)
3. Journal entries your company would record at 1) the date of issuance 2) the first interest payment date and 3) the maturity date.
4. Calculation of the total cost (expense) of issuing the bond and the total cash impact to your company over the life of the bond (ex: net ALL of the cash flows over the life of the bond).

Answer 1

a.)	Date	Interest Payment/Maturity amount $	Present Value Factor @1.5%	Present Value $
	June 30,2019	30,000	0.98522	29,557
	December 31,2019	30,000	0.97066	29,120
	June 30,2020	30,000	0.95632	28,690
	December 31,2020	30,000	0.94218	28,266
	June 30,2021	30,000	0.92826	27,848
	December 31,2021	30,000	0.91454	27,436
	June 30,2022	30,000	0.90103	27,031
	December 31,2022	30,000	0.88771	26,631
	June 30,2023	30,000	0.87459	26,238
	December 31,2023	30,000	0.86167	25,850
	January 1,2024	1,000,000	0.86167	861,667
	Total	1,300,000		1,138,333
	Issue price of Bond is $1,138,333.
b.)	Amortization table					Amount in $
	Date	Interest Payment @3% of 1,000,000	Interest Expense @1.5% of opening Carrying amount	Amortization of Premium	Remaining Discount on Premium	Carrying amount
	January 1, 2019	-	-	-	138,333	1,138,333
	June 30,2019	30,000	17,075	12,925	125,408	1,125,408
	December 31,2019	30,000	16,881	13,119	112,289	1,112,289
	June 30,2020	30,000	16,684	13,316	98,973	1,098,973
	December 31,2020	30,000	16,485	13,515	85,458	1,085,458
	June 30,2021	30,000	16,282	13,718	71,740	1,071,740
	December 31,2021	30,000	16,076	13,924	57,816	1,057,816
	June 30,2022	30,000	15,867	14,133	43,683	1,043,683
	December 31,2022	30,000	15,655	14,345	29,339	1,029,339
	June 30,2023	30,000	15,440	14,560	14,779	1,014,779
	December 31,2023	30,000	15,222	14,778	0	1,000,000
	Total	300,000	161,667	138,333
c.)	Journal Entries:-
	Date	Account Titles	Debit $	Credit $
	January 1, 2019	Cash	1,138,333
		Bond Payable		1,000,000
		Premium on Bond		138,333
	June 30,2019	Interest Expense	17,075
		Premium on Bond	12,925
		Cash		30,000
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