Question

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

Ans:

1) Actual proceeds received from the issuance of bonds =$1,851,250

Working:

Present value of bond + present value of interest payments

Present value of bond :

Face value = $2,000,000

Period, n = 10 x 2 = 20

Market rate of interest = 6%, semi-annual periods,

effective interest = 6%/2 = 3%

Present value of bonds = $2,000,000 x (P/F, 3%, 20)

=$ 2,000,000 x (0.5537) = $1,107,400

Present value of interest :

semi-annual interest x (P/A, 3%, 20)

Semi-annual interest = 2,000,000 x 5% x 6/12 = $50,000

Present value of interest = 50,000 x 14.877 = $743,850

Actual proceeds received from bond issue = 1,107,400 + 743,850 = $1,851,250

2) Amortization schedule for Year 1 and Year 2 using effective interest rate method:

	Date	Cash Paid	Interest Expense	Discount Amortization	Bond Carrying Value
Year 1	1-Jan	2,000,000*2.5%			$1,851,250
	30-Jun	$50,000	$55,538	$5,538	$1,856,788
	31-Dec	$50,000	$55,704	$5,704	$1,862,492
Year 2	30-Jun	$50,000	$55,875	$5,875	$1,868,367
	31-Dec	$50,000	$56,051	$6,051	$1,874,418

3)Balance sheet

	Year 2
Bonds payable	2000000
Less: unamortized discount on bonds payable	(125,582)
Reported at (Long term liabilities)	1,874,418

Note:

The bonds are issued at discount, Discount on Bonds Payable = 2,000,000 – 1,851,250 = $148,750

Unamortized discount on bonds payable =discount on bonds payable – amortized discount

                                                                 = 148,750 – (5,538 + 5,704+ 5,875 + 6,051)

                                                                = $125,582