Question

Banjo Education Corp. issued a 4%, $150,000 bond that pays interest semiannually each June 30 and December 31. The date of issuance was January 1, 2020. The bonds mature after four years. The market interest rate was 6%. Banjo Education Corp.’s year-end is December 31.

Required

Preparation Component:

1. Calculate the issue price of the bond.

2. Prepare a general journal entry to record the issuance of the bonds.

3. Determine the total bond interest expense that will be recognized over the life of these bonds.

4. Prepare the first two years of an amortization table based on the effective interest method.

5. Present the journal entries Banjo would make to record the first two interest payments.

Analysis Component: Now assume that the market interest rate on January 1, 2020, was 3% instead of 6%. Without presenting any specific numbers, describe how this change would affect the amounts presented on Banjo’s financial statements.

Answer 1

Semi annual cash interest = 150,000*4%*6/12 =	3000
Price of Bonds
n = 8
I = 3%
Cash flows		Amount $	PVF	Present value
Semi annual interest		3000	5.4172	16251.6
Maturity amount		1,50,000	0.83748	125622
Price of Bonds				141873.6
Journal entry:
S.no.	Accounts title and explanations		Debit $	Credit $
a.	Cash account			141874
	Discount on bonds payable		8126
	Bonds payable				150000
	(for issuance of bonds)
Total Interest expense
8 payments of 3000 each	24000
Maturity value		150000
Total repayment		174000
Less: Amount borrowed	141874
Total Interest expense	32126
Amort Chart:
Date	Cash Int.	Int. Exp.	Discount	Unamortize	Carrying
			Amortized	Discount	value
01.01.20				8126	141874
30.06.20	3,000	4256	1256	6870	143130
31.12.20	3000	4294	1294	5576	144424
Journal entry:
S.no.	Accounts title and explanations		Debit $	Credit $
30.06.20	Interest expense			4256
	Cash account				3000
	Discount on bonds payable			1256
	(for interest expense incurred)
31.12.20	Interest expense			4294
	Cash account				3000
	Discount on bonds payable			1294
	(for interest expense incurred)
Analysis:
When the market rate of interest is 3% instead of 6%, then the bonds will have been issued at premium.
The bonds payable is shown as carrying amount which is higher than the par value in the balance sheet.