Question

Jan 1, 2020 - Issue 1,000 - $1,000 5-year 10% bonds, to yield 8%; Interest is paid semi-annually on June 30^th and Dec 31^st. (Round all numbers to nearest dollar throughout).

1.Calculate the PV of the bond obligation.

2.Make the original JE for issuance on Jan 1, 2020

3.Prepare the first four lines of the amortization table

4.Make the JEs for June 30 and Dec 31 of 2020.

Answer 1

1
Present value of bond obligation	Coupon amount*PV of annuity (i=4%,n=10)+Par value*Discount factor (i=4%, n=10)
Present value of bond obligation	(1000*5%*8.1109)+(1000*0.6756)
Present value of bond obligation	$1,081,108.96
2
Journal entry to record issue of bond
Date	General Journal	Debit	Credit
1-Jan	Cash	$1,081,109
	Bonds payable		$1,000,000
	Premium on bonds payable (1081108.96-1000000)		$81,109
	(To record issue of bond)
3
Prepare amortization table
Time period	Coupon amount	Interest expense	Premium amortized	Bond obligation
0				$1,081,109
0.5	$50,000	$43,244	$6,756	$1,074,353
1	$50,000	$42,974	$7,026	$1,067,327
1.5	$50,000	$42,693	$7,307	$1,060,021
2	$50,000	$42,401	$7,599	$1,052,421
4
Journal entry on 30th June
Date	General Journal	Debit	Credit
1-Jan	Interest expense	$43,244
	Premium on bonds payable	$6,756
	Cash		$50,000
	(To record interest expense for June)
Journal entry on 31st Dec
Date	General Journal	Debit	Credit
1-Jan	Interest expense	$42,974
	Premium on bonds payable	$7,026
	Cash		$50,000
	(To record interest expense for June)