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
- Determine the issue price.
- Show the calculations in the table opening/closing values of bonds and interest coupan payment and interest expense etc. to complete part c below.
- 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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