Question

Caprio Inc. sells $500,000 of 10% bonds on June 1, 2015. The bonds pay interest on December 1 and June 1. The due date of the bonds is June 1, 2020. The bonds yield 8%. On October 1, 2016, Caprio buys back $200,000 (face value) of bonds for $210,000 in cash (not including accrued interest which was paid separately – also in cash). Provide the following: Show EXCEL FORMULAS

a. The present value of the bond payable is $ ______________________ on June 1, 2015. Round to the nearest dollar.

b. Prepare a well-labeled schedule (with debits/credits shown) for the journal entries through the life of the Bond.

c. Give all journal entries for:

•6/1/15

•12/1/15

•12/31/15

•6/1/16

•10/1/16 Update

•10/1/16 accrued interest payment

•10/1/16 redemption

Answer 1

Basic details
Coupon rate per Period (10%/2)	5.00%
Face value of bond	500,000
Market or Discounting rate per Period (8%/2)	4.00%
Interest paid (500000*5%)	25000
Payment at end of period with Face value(500000+25000)	525000
Interest paid on	Semi annually

Present Value of bond
Period	Payment	Discounting Factor @ 4%	Present Value
Dec 1, 2015	25000	0.961538	24038.46
Jun 1, 2016	25000	0.924556	23113.91
Dec 1, 2016	25000	0.888996	22224.91
Jun 1, 2017	25000	0.854804	21370.10
Dec 1, 2017	25000	0.821927	20548.18
Jun 1, 2018	25000	0.790315	19757.86
Dec 1, 2018	25000	0.759918	18997.95
Jun 1, 2019	25000	0.730690	18267.26
Dec 1, 2019	25000	0.702587	17564.67
Jun 1, 2020	525000	0.675564	354671.19
Present value of Bond			540554
Less: face value of Bond			500000
Premium on Bond payable			40554

Fair value
Interest payment (Credit Cash) = Face value of bond * Coupon rate
Interest Expense (Debit Interest Expense) = book value of Bond for previous period * Market or Discounting rate
Amortization of bond premium (Debit Bond Premium) = Interest payment - Interest Expense
Credit Balance in Bond premium = Credit Balance in Bond premium for previous period - Amortization of bond premium
Credit Balance in Bond Payable = Face value of bond
Book value of Bond = Credit Balance in Bond premium + Credit Balance in Bond Payable
Bond Premium Amortization Table
Credit Balance in Bond premium at end of retirement of bond payable must be Zero.
Period	Date		Interest payment	Interest Expense	Amortization of bond premium	Credit Balance in Bond premium	Credit Balance in Bond Payable	Book value of Bond
0	Jun 1, 2015					40554	500000	540554
1	Dec 1, 2015		25000	21622	3378	37177	500000	537177
2	Jun 1, 2016		25000	21487	3513	33664	500000	533664
3	Dec 1, 2016		25000	21347	3653	30010	500000	530010
4	Jun 1, 2017		25000	21200	3800	26211	500000	526211
5	Dec 1, 2017		25000	21048	3952	22259	500000	522259
6	Jun 1, 2018		25000	20890	4110	18149	500000	518149
7	Dec 1, 2018		25000	20726	4274	13875	500000	513875
8	Jun 1, 2019		25000	20555	4445	9430	500000	509430
9	Dec 1, 2019		25000	20377	4623	4808	500000	504808
10	Jun 1, 2020		25000	20192	4808	0	500000	500000

Company Name
Journal entries
Date	General journal	Debit	Credit
Jun 1, 2015	Cash	540554
	Bond payable		500000
	Premium on bond payable		40554
	(To record issued of bond payable at Premium.)
Dec 1, 2015	Interest expense	21622
	Premium on bond payable	3378
	Cash		25000
	(To record interest expense and amortization of bond premium.)
Dec 31, 2015	Interest expense (21487 / 6 )	3581
	Premium on bond payable (3513 / 6)	586
	Interest payable (500000*10%*1/12)		4167
	(To record accrued interest for one month) (Divided by 6 because of interest paid on 6 month.)
Jun 1, 2016	Interest expense (21487*5 / 6 )	17906
	Premium on bond payable (3513*5 / 6)	2928
	Interest payable	4167
	Cash		25000
	(To record interest expense and amortization of bond premium.)
Oct 1, 2016	Interest expense (8539*4 / 6 )	5693
	Premium on bond payable (1461 *4 / 6)	974
	Interest payable (200000*10%*4/12)		6667
	(To record accrued interest for Four month) ( 1 June to 1 Oct) (Divided by 6 because of interest paid on 6 month.)
Oct 1, 2016	Interest payable (200000*10%*4/12)	6667
	Cash		6667
	(To record accrued interest payment.)
Oct 1, 2016	Bond payable	200000
	Premium on bond payable (212492-200000)	12492
	Gain on retirement (Buy back) of bond		2492
	Cash		210000
	(To record Retirement of bond payable.)

	Interest expense	Amortization of premium
Amount from above table for Dec 1, 2016	21347	3653
Divided by 500000 face value of bond	500000	500000
	0.042694	0.007306
Multiply by: 200000 Face value bond buy back before maturity	200000	200000
Value for 200000 face value of bond	8539	1461
Bond value on June 1, 2016 For face value of 500000		533664
Bond value on June 1, 2016 For face value of 200000 (533664*200000/500000)		213466
Less: amortization of bond for 4 month (1 Jun to 1 Oct)		974
Book value of bond for face value of 200000		212492
Less: cash paid for buy back of bond		210000
Gain on retirement (Buy back) of bond		2492