Question

In: Accounting

On January 1, 2018, the Company issued a 4-year, 9%, $500,000 bond that will pay interest...

On January 1, 2018, the Company issued a 4-year, 9%, $500,000 bond that will pay interest at the end of each month. The market rate at the time of issue was 7%.

The assignment requires you to calculate the issue price (present value of the bond) as well as the discount or premium. The assignment then requires you complete the entire amortization schedule from issue date through maturity. The last requirement asks you to prepare three journal entries

Solutions

Expert Solution

a.
Issue Price $ 5,34,807.40
Working:
a. Monthly Interest payment = Face Value * Monthly Interest rate
= $       5,00,000 *9%*1/12
= $             3,750
b. Present value of annuity of 1 = (1-(1+i)^-n)/i Where,
= (1-(1+0.005833)^-48)/0.005833 i 7%/12 = 0.005833
=             41.7605 n 4*12 = 48
Present value of 1 = (1+i)^-n
= (1+0.005833)^-48
=               0.7564
c. Present value of coupon interest = $             3,750 *    41.7605 = $ 1,56,601.97
Present Value of Face Value = $       5,00,000 *      0.7564 = $ 3,78,205.43
Total $ 5,34,807.40
b. Issue Price $ 5,34,807.40
Less:Face Value $       5,00,000
Premium $     34,807.40
c. Amortization table:
Month Interest paid in cash Interest Expense Premium amortized Unamortized Premium Carrying Value of Bond
a b c=a-b d e
0 $ 34,807.40 $ 5,34,807.40
1 $    3,750 $ 3,119.71 $           630.29 $ 34,177.11 $ 5,34,177.11
2 $    3,750 $ 3,116.03 $           633.97 $ 33,543.14 $ 5,33,543.14
3 $    3,750 $ 3,112.33 $           637.67 $ 32,905.48 $ 5,32,905.48
4 $    3,750 $ 3,108.62 $           641.38 $ 32,264.09 $ 5,32,264.09
5 $    3,750 $ 3,104.87 $           645.13 $ 31,618.96 $ 5,31,618.96
6 $    3,750 $ 3,101.11 $           648.89 $ 30,970.08 $ 5,30,970.08
7 $    3,750 $ 3,097.33 $           652.67 $ 30,317.40 $ 5,30,317.40
8 $    3,750 $ 3,093.52 $           656.48 $ 29,660.92 $ 5,29,660.92
9 $    3,750 $ 3,089.69 $           660.31 $ 29,000.61 $ 5,29,000.61
10 $    3,750 $ 3,085.84 $           664.16 $ 28,336.44 $ 5,28,336.44
11 $    3,750 $ 3,081.96 $           668.04 $ 27,668.41 $ 5,27,668.41
12 $    3,750 $ 3,078.07 $           671.93 $ 26,996.47 $ 5,26,996.47
13 $    3,750 $ 3,074.15 $           675.85 $ 26,320.62 $ 5,26,320.62
14 $    3,750 $ 3,070.20 $           679.80 $ 25,640.82 $ 5,25,640.82
15 $    3,750 $ 3,066.24 $           683.76 $ 24,957.06 $ 5,24,957.06
16 $    3,750 $ 3,062.25 $           687.75 $ 24,269.31 $ 5,24,269.31
17 $    3,750 $ 3,058.24 $           691.76 $ 23,577.55 $ 5,23,577.55
18 $    3,750 $ 3,054.20 $           695.80 $ 22,881.75 $ 5,22,881.75
19 $    3,750 $ 3,050.14 $           699.86 $ 22,181.89 $ 5,22,181.89
20 $    3,750 $ 3,046.06 $           703.94 $ 21,477.95 $ 5,21,477.95
21 $    3,750 $ 3,041.95 $           708.05 $ 20,769.91 $ 5,20,769.91
22 $    3,750 $ 3,037.82 $           712.18 $ 20,057.73 $ 5,20,057.73
23 $    3,750 $ 3,033.67 $           716.33 $ 19,341.40 $ 5,19,341.40
24 $    3,750 $ 3,029.49 $           720.51 $ 18,620.90 $ 5,18,620.90
25 $    3,750 $ 3,025.29 $           724.71 $ 17,896.18 $ 5,17,896.18
26 $    3,750 $ 3,021.06 $           728.94 $ 17,167.25 $ 5,17,167.25
27 $    3,750 $ 3,016.81 $           733.19 $ 16,434.05 $ 5,16,434.05
28 $    3,750 $ 3,012.53 $           737.47 $ 15,696.59 $ 5,15,696.59
29 $    3,750 $ 3,008.23 $           741.77 $ 14,954.82 $ 5,14,954.82
30 $    3,750 $ 3,003.90 $           746.10 $ 14,208.72 $ 5,14,208.72
31 $    3,750 $ 2,999.55 $           750.45 $ 13,458.27 $ 5,13,458.27
32 $    3,750 $ 2,995.17 $           754.83 $ 12,703.44 $ 5,12,703.44
33 $    3,750 $ 2,990.77 $           759.23 $ 11,944.21 $ 5,11,944.21
34 $    3,750 $ 2,986.34 $           763.66 $ 11,180.55 $ 5,11,180.55
35 $    3,750 $ 2,981.89 $           768.11 $ 10,412.44 $ 5,10,412.44
36 $    3,750 $ 2,977.41 $           772.59 $   9,639.85 $ 5,09,639.85
37 $    3,750 $ 2,972.90 $           777.10 $   8,862.75 $ 5,08,862.75
38 $    3,750 $ 2,968.37 $           781.63 $   8,081.11 $ 5,08,081.11
39 $    3,750 $ 2,963.81 $           786.19 $   7,294.92 $ 5,07,294.92
40 $    3,750 $ 2,959.22 $           790.78 $   6,504.14 $ 5,06,504.14
41 $    3,750 $ 2,954.61 $           795.39 $   5,708.75 $ 5,05,708.75
42 $    3,750 $ 2,949.97 $           800.03 $   4,908.71 $ 5,04,908.71
43 $    3,750 $ 2,945.30 $           804.70 $   4,104.02 $ 5,04,104.02
44 $    3,750 $ 2,940.61 $           809.39 $   3,294.62 $ 5,03,294.62
45 $    3,750 $ 2,935.89 $           814.11 $   2,480.51 $ 5,02,480.51
46 $    3,750 $ 2,931.14 $           818.86 $   1,661.64 $ 5,01,661.64
47 $    3,750 $ 2,926.36 $           823.64 $       838.00 $ 5,00,838.00
48 $    3,750 $ 2,912.00 $           838.00 $          -0.00 $ 5,00,000.00
d.
Journal Entries:
Date Account tiles and Explanation Debit Credit
January 1, 2018 Cash $ 5,34,807.40
Bonds Payable $ 5,00,000.00
Premium on bonds payable $     34,807.40
(To record issuance of bond)
January 31, 2018 Interest Expense $       3,119.71
Premium on bonds payable $           630.29
Cash $             3,750
(To record interest expense)
December 31, 2021 Bonds Payable $ 5,00,000.00
Cash $ 5,00,000.00
(To record redemption of bond at maturity)

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