In: Accounting
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
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) | |||||||||||||