Question

1. On January 1, 2017, Park Rapids Lumber Company issued $80 million in 20-year, 10.5% bonds payable. Interest is payable semiannually on June 30 and December 31.

1. Record the journal entry when the bonds were issued on January 1, 2017 when the market rate was 10%, and record the payment of bond interest on June 30^th and December 31^st for 2017 and 2018.

      b.    Compute the net bond liability at December 31, 2018.

            c. On January 1, 2019 the bonds were repurchased for 101. Record the journal entry for the repurchase of the bonds.   This transaction is very similar to the sale of a fixed asset. 101 is the same as 101% of the face value of the bond.

Answer 1

Solution a:

Computation of bond price
Table values are based on:
n=	40
i=	5.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.14205	$80,000,000.00	$11,363,655
Interest (Annuity)	17.15909	$4,200,000.00	$72,068,163
Price of bonds			$83,431,817

Bond Amortization Schedule - Effective interest method
Date	Cash Paid	Interest Expense	Premium Amortized	Unamortized Premium	Carrying Value
1-Jan-17				$3,431,817	$83,431,817
30-Jun-17	$4,200,000	$4,171,591	$28,409	$3,403,408	$83,403,408
31-Dec-17	$4,200,000	$4,170,170	$29,830	$3,373,578	$83,373,578
30-Jun-18	$4,200,000	$4,168,679	$31,321	$3,342,257	$83,342,257
31-Dec-18	$4,200,000	$4,167,113	$32,887	$3,309,370	$83,309,370

Journal Entries - Park Rapids Lumber Company
Date	Particulars	Debit	Credit
1-Jan-17	Cash Dr	$83,431,817.00
	To Bond Payable		$80,000,000.00
	To Premium on Bond Payable		$3,431,817.00
	(To record issue of bond at premium)
30-Jun-17	Interest Expense Dr	$4,171,509.00
	Premium on bond payable Dr	$28,491.00
	To Cash		$4,200,000.00
	(To record interest payment and premium amortization)
31-Dec-17	Interest Expense Dr	$4,170,170.00
	Premium on bond payable Dr	$29,830.00
	To Cash		$4,200,000.00
	(To record interest payment and premium amortization)
30-Jun-18	Interest Expense Dr	$4,167,113.00
	Premium on bond payable Dr	$32,887.00
	To Cash		$4,200,000.00
	(To record interest payment and premium amortization)
31-Dec-18	Interest Expense Dr	$4,168,679.00
	Premium on bond payable Dr	$31,321.00
	To Cash		$4,200,000.00
	(To record interest payment and premium amortization)		$

Solution b:

Net bond liability at December 31, 2018 = $83,309,370

Solution c:

Journal Entries - Park Rapids Lumber Company
Date	Particulars	Debit	Credit
1-Jan-19	Bond Payable Dr	$80,000,000.00
	Premium on bond payable Dr	$3,309,370.00
	To Cash		$80,800,000.00
	To Gain on retirement of bond		$2,509,370.00
	(To record early retirement of bond)