Rama Corporation issued $600,000 of 8% term bonds on January 1, 2017, due on January 1,...

Rama Corporation issued $600,000 of 8% term bonds on January 1, 2017, due on January 1, 2022, with interest payable each July 1 and January 1. Investors require an effective-interest rate of 10%.

Prepare the journal entry at the date of the bond issuance (show the calculation)?
Prepare a schedule of interest expense and bond amortization from 1/1/2017 to 1/1/2020?
Prepare the journal entry to record the interest payment and the amortization for July 1, 2018.
Prepare the journal entry to record the interest payment and the amortization for December 31, 2019.
Calculate the discount on bonds payable (show the calculation).

Solutions

Expert Solution

Value of Bond
Semi annual period	Interest payment	Discount rate @ 5%	Discounted interest
1	24000	0.95238	22857.12
2	24000	0.90703	21768.72
3	24000	0.86384	20732.16
4	24000	0.82270	19744.8
5	24000	0.78353	18804.72
6	24000	0.74622	17909.28
7	24000	0.71068	17056.32
8	24000	0.67684	16244.16
9	24000	0.64461	15470.64
10	24000	0.61391	14733.84
10	600000	0.61391	368346
		Total value	553667.8

Total discount = Total present value of bond - Face value of bonds = 553668- 600000=46332

Schedule of amortization

Semi annual Period	Opening Amount	Interest @ 5%	Interest payment @ 4%	Difference	Closing Value
01-07-17	553668	27683	24000	3683	557351
01-01-18	557351.4	27868	24000	3868	561219
01-07-18	561219	28061	24000	4061	565280
01-01-19	565279.9	28264	24000	4264	569544
01-07-19	569543.9	28477	24000	4477	574021
01-01-20	574021.1	28701	24000	4701	578722

Journal entries

01.07.18 Interest expense(debit) 27868

Cash (credit) 240000

Bonds payable(credit) 3868

(To record interest expense on 1.7.18)

31.12.19 Interest expense (debit) 28701

Interest payable (credit) 24000

Bonds payable(credit) 4701

(To record interest expense on 31.12.19)

ekkarill92 answered 1 year ago

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