Question

Hopkins Ltd. issued five-year bonds with a face value of $250,000 on January 1. The bonds have a coupon interest rate of 5% and interest is paid semi-annually on June 30 and December 31. The market interest rate was 6% when the bonds were issued at a price of 97.

Using above information, determine the proceeds received by the company when the bonds were issued.

Proceeds from issue of the bonds : $242 500

Determine the interest expense recorded for the six months ending June 30 when the first interest payment is made.

Interest expense: 7275

Determine the balance in the Bonds Payable account immediately following the first interest payment

Balance in bonds payable account: ???

Answer 1

1)	Proceeds from the bonds = 250000*97% =	242500
2)	Interest expense for the 6 months ending 30th June = 242500*6%/2 =	7275
3)	Bonds payable	250000
	Discount on bonds payable [7500-1025] =	6475
	Bonds payable (Net)	243525
	WORKINGS:
	Interest to be paid in cash = 250000*2.5% =	6250
	Interest expense = 242500*3% =	7275
	Discount amortized = 7275-6250 =	1025
	NOTE:
	The balance in the bonds payable account will be $250000, till it is redeemed.
	The net value of the bonds payable to be reported in the balance sheet will keep on increasing till it reaches the bond face value of $250000.
	In this case the net value on issue is 250000 less the discount of 7500, which is equal to 242500.
	When the first interest is paid, the interest expense accounted will include the discount amortized. The amortization reduces the balance in the discount on bonds payable account, thereby increasing the net amount reported in the balance sheet.
	Thus the net amount reported in the balance sheet as at 30th June becomes 243525.