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On January 1, 2015 $20,000,000 of 20 year bonds were issued with a coupon rate of...

On January 1, 2015 $20,000,000 of 20 year bonds were issued with a coupon rate of 6.5% when the market rate was 6%. Interest is paid every six months on June 30th and December 31st. Prepare the following journal entries and show your calculations as to how you arrived at the numbers.

1)Issuance of bonds on January 1, 2015

2) Payment of interest on June 30th and December 31st of both 2015 and 2016.

3) What is the carrying value of the bonds that would be presented on the balance sheet at December 31st 2016.

Solutions

Expert Solution

Face Value of Bonds = $20,000,000

Annual Coupon Rate = 6.50%
Semiannual Coupon Rate = 3.25%
Semiannual Coupon = 3.25% * $20,000,000
Semiannual Coupon = $650,000

Time to Maturity = 20 years
Semiannual Period = 40

Annual Interest Rate = 6.00%
Semiannual Interest Rate = 3.00%

Issue Value of Bonds = $650,000 * PVIFA(3.00%, 40) + $20,000,000 * PVIF(3.00%, 40)
Issue Value of Bonds = $650,000 * 23.11477 + $20,000,000 * 0.30656
Issue Value of Bonds = $21,155,801

Amortization table for 2015 and 2016 is:

Answer 1 and 2.

Answer 3.

Carrying value of the bonds is $21,091,683

ekkarill92 answered 2 hours ago
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