Question

In: Accounting

On 1 July 2018 Mi Ltd issues $32 000 000 in five-year debentures that pay interest...

On 1 July 2018 Mi Ltd issues $32 000 000 in five-year debentures that pay interest each six months at a coupon rate of 8 per cent. At the time of issuing the securities, the market requires a rate of return of 6 per cent. Interest expense is determined using the effective-interest method.

Note: PV and Annuity tables are provided on the last page of this document

REQUIRED

  1. Determine the issue price.
  2. Show the calculations in the table opening/closing values of bonds and interest coupan payment and interest expense etc. to complete part c below.
  3. Provide the journal entries at: (i) 1 July 2018, (ii) 31 Decmeber 2019 and (iii) 30 June 2020

Solutions

Expert Solution

Answer:
a) Caculation of Issue price of Bonds
Period Cash Flows PVF@3% Present value
1-10 1280000 8.530202837 $                              1,09,18,660
10 32000000 0.744093915 $                              2,38,11,005
$                              3,47,29,665
The issue Price of bonds = $ 3,47,26,665
b) Closing and opening balance of Bonds
Period Opening balance Cash Interest = FV @4% Interest expense @ 3% Amortization of Premium Balance in the Bond Premium Balance in Bond payable A/c Closing balance of Book Value of bond
a b c = a*3% d = b-c e f g
0 $                  27,29,665 $         3,20,00,000 $                   3,47,29,665
1 $       3,47,29,665 $                    12,80,000 $                                  10,41,890 $                    2,38,110 $                  24,91,555 $         3,20,00,000 $                   3,44,91,555
2 $       3,44,91,555 $                    12,80,000 $                                  10,34,747 $                    2,45,253 $                  22,46,302 $         3,20,00,000 $                   3,42,46,302
3 $       3,42,46,302 $                    12,80,000 $                                  10,27,389 $                    2,52,611 $                  19,93,691 $         3,20,00,000 $                   3,39,93,691
4 $       3,39,93,691 $                    12,80,000 $                                  10,19,811 $                    2,60,189 $                  17,33,501 $         3,20,00,000 $                   3,37,33,501
5 $       3,37,33,501 $                    12,80,000 $                                  10,12,005 $                    2,67,995 $                  14,65,506 $         3,20,00,000 $                   3,34,65,506
6 $       3,34,65,506 $                    12,80,000 $                                  10,03,965 $                    2,76,035 $                  11,89,472 $         3,20,00,000 $                   3,31,89,472
7 $       3,31,89,472 $                    12,80,000 $                                    9,95,684 $                    2,84,316 $                    9,05,156 $         3,20,00,000 $                   3,29,05,156
8 $       3,29,05,156 $                    12,80,000 $                                    9,87,155 $                    2,92,845 $                    6,12,310 $         3,20,00,000 $                   3,26,12,310
9 $       3,26,12,310 $                    12,80,000 $                                    9,78,369 $                    3,01,631 $                    3,10,680 $         3,20,00,000 $                   3,23,10,680
10 $       3,23,10,680 $                    12,80,000 $                                    9,69,320 $                    3,10,680 $                                  0 $         3,20,00,000 $                   3,20,00,000
c) Journal entries
Date Account Tittle Debit Credit
July - 01,2018 Cash A/c $                              3,47,29,665
Bonds Payable A/c $              3,20,00,000
Premium on bonds A/c $                  27,29,665
December 31, 2018 Interest expenses a/c $                                  10,41,890
Premium on bonds A/c $                                    2,38,110
Cash A/c $                  12,80,000
June -30,2018 Interest expenses a/c $                                  10,34,747
Premium on bonds A/c $                                    2,45,253
Cash A/c

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