Question

a) On January 1, XXX1, a company issued $20,000, 10%, 5-year bonds at a price of $22,000. The straight-line method is used to amortize any bond discount or premium and interest is paid semiannually on June 30 and December 31. If all interest has been accounted for properly, what is the carrying value of these bonds three years later on January 1, XXX4?

b) On January 1, XXX1, a company issued $20,000, 10%, 5-year bonds at a price of $18,000. The straight-line method is used to amortize any bond discount or premium and interest is paid semiannually on June 30 and December 31. If all interest has been accounted for properly, what is the carrying value of these bonds three years later on January 1, XXX4?

c) A company issues $20,000, 10%, 2-year bonds at par value. Interest is payable semiannually. What journal entry does the issuer make to record the interest it pays semiannually?

d) A company issues 10-year, 8% bonds with a par value of $20,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 10%, which results in a selling price of 87 ½. The straight-line amortization method is used. What are the issuer's cash proceeds from issuance/sale of these bonds?

Answer 1

Formula sheet

A	B	C	D	E	F	G	H
2		a)
3		Par value (F)	20000
4		Interest rate (Coupon rate)	0.1
5		Time to maturity	5	Years
6		Semi-annual Coupon	=D3*D4/2
7		Bond has been issued at price	22000
8
9		Journal Entry for issuance of the bond will be:
10		Account	Debt	Credit
11		Cash	=D7
12		Bonds Payable		=D3
13		Premium on Bonds Issued		=D11-E12
14
15		Straight Line Amortization:
16		In Straight Line Amortization, same amount of amortization is done each period.
17		Given the following data:
18		Premium on Bond Payable	=E13
19		Total number of semiannual period	=D5*2
20		Amortization per semiannual period	=Premium on Bond Payable / Total number of periods
21			=D18/D19
22
23		Hence amortization per semi-annual period using straight line amortization is	=D21
24		Since bond is issued at premium therefore actual interest expense will be lesser than coupon paid,
25		therefore amortization needs to be substract from coupon paid to calculate the interest expense.
26
27		Amortization Table (Straight Line)
28		Date	Coupon Paid (@5% of face value)	Amortization	Interest Expense	Bond Carrying Value
29		43101				=D7
30		6/30/20X1	=$D$6	=$D$23	=D30-E30	=G29-E30
31		12/31/20X1	=$D$6	=$D$23	=D31-E31	=G30-E31
32		6/30/20X2	=$D$6	=$D$23	=D32-E32	=G31-E32
33		12/31/20X2	=$D$6	=$D$23	=D33-E33	=G32-E33
34		6/30/20X3	=$D$6	=$D$23	=D34-E34	=G33-E34
35		12/31/20X3	=$D$6	=$D$23	=D35-E35	=G34-E35
36
37		Carrying Value of Bond on Jan1 20X4 is	=G35
38
39		b)
40
41		Par value (F)	20000
42		Interest rate (Coupon rate)	0.1
43		Time to maturity	5	Years
44		Semi-annual Coupon	=D41*D42/2
45		Bond has been issued at price	18000
46
47		Journal Entry for issuance of the bond on January 1 will be:
48		Account	Debt	Credit
49		Cash	=D45
50		Discount on Bond Payable	=E51-D49
51		Bonds Payable		=D41
52
53
54		Straight Line Amortization:
55		In Straight Line Amortization, same amount of amortization is done each period.
56		Given the following data:
57		Discount on Bond Payable	=D50
58		Total number of semiannual period	=D43*2
59		Amortization per semiannual period	=Discount on Bond Payable / Total number of periods
60			=D57/D58
61
62		Hence amortization per semi-annual period using straight line amortization is	=D60
63		Since bond is issued at discount therefore actual interest expense will be higher than coupon paid,
64		therefore amortization needs to be added to coupon paid to calculate the interest expense.
65
66		Amortization Table (Straight Line)
67		Date	Coupon Paid (@5% of face value)	Amortization	Interest Expense	Bond Carrying Value
68		43101				=D45
69		6/30/20X1	=$D$44	=$D$62	=D69+E69	=G68+E69
70		12/31/20X1	=$D$44	=$D$62	=D70+E70	=G69+E70
71		6/30/20X2	=$D$44	=$D$62	=D71+E71	=G70+E71
72		12/31/20X2	=$D$44	=$D$62	=D72+E72	=G71+E72
73		6/30/20X3	=$D$44	=$D$62	=D73+E73	=G72+E73
74		12/31/20X3	=$D$44	=$D$62	=D74+E74	=G73+E74
75
76		Carrying Value of Bond on Jan1 20X4 is	=G74
77