Question

Plyogenisis, Inc. has three bond issues outstanding at 12/31/17:

Bond A--$5,000,000, 4.5% bonds issued on January 1, 2017, due December 31, 2022. Interest is payable June 30 and December 31. Bonds were initially priced to yield 4%.

Bond B--$3,000,000, 5.5% bonds issued on January 1, 2015, due December 31, 2020. Interest is payable June 30 and December 31. Bonds were initially priced to yield 6%.

Bond C--$4,000,000, zero coupon bonds issued on February 1, 2015, due January 31, 2025. Interest is compounded annually. Bonds were initially priced to yield 4%.

Required:

1.Prepare the full amortization scheduleseach of the three the bonds in Excel.

2.Prepare the journal entries necessary to record the 2017 activity.

3.Prepare any adjusting entries necessary at 12/31/17.

4.For each bond, show what would have appeared on the December 31, 2017 and 2018 financial statements. Be sure to show the proper description and classification for each item.Use the indirect method to report cash flows from operations.

Answer 1

1. Amortization table for Bond A:

A	B	C	D	E	F
Date	Interest payment @4.5% p.a	Effective Interest (Market rate 4% P.A ON previous BV in F)	Amortization of bond premium (B-C)	Balance in Premium account	Carrying value of bonds payable
	Credit cash	Debit Int expense
				132,192	5,132,192
Jun 30 2017	112,500	102,643.84	9,856	122,335.60	5,122,336
Dec 31 2017	112,500	102,446.71	10,053	112,282.31	5,112,282
Jun 30 2018	112,500	102,245.65	10,254	102,027.96	5,102,028
Dec 31 2018	112,500	102,040.56	10,459	91,568.52	5,091,569
Jun 30 2019	112,500	101,831.37	10,669	80,899.89	5,080,900
Dec 31 2019	112,500	101,618.00	10,882	70,017.89	5,070,018
Jun 30 2020	112,500	101,400.36	11,100	58,918.24	5,058,918
Dec 31 2020	112,500	101,178.36	11,322	47,596.61	5,047,597
Jun 30 2021	112,500	100,951.93	11,548	36,048.54	5,036,049
Dec 31 2021	112,500	100,720.97	11,779	24,269.51	5,024,270
Jun 30 2022	112,500	100,485.39	12,015	12,254.90	5,012,255
Dec 31 2022	112,500	100,245.10	12,255	0.00	5,000,000

Workings to determine the carrying value of the Bond and the premium:

Bonds Payable - Carrying value of bonds is calculated as follows:

Bond Value = {c/m*f*((1-(1+i/m)^-n*m)/(i/m))}+(f/(1+(i/m))^n*m)

c- Coupon rate

f- face value

i- yield rate

m- Number of coupon payments per year

n - number of years till maturity

Bond A	5000000
Facevalue (f) per unit	100
Coupon rate ©	4.5%
Yield rate (i)	4%
Number of coupon payments per year (m)	2
Number of years till maturity (n)	6

c/m	0.0225
Facevalue -F	100.00
C/M*F	2.25
(1-(1+i/m)^-n*m)	0.21
i/m	2%
(1-(1+i/m)^-n*m)/(i/m))	10.58
(1+(i/m))^n*m)	1.27
(f/(1+(i/m))^n*m)	78.85
Bond value per unit	102.64
Bond value or Carrying value = 5,000,000/100*102.64	5,132,191.77

Premium = 5,132,191.77 - 5,000,000 = 132,191.77

Bond B Amortization schedule:

A	B	C	D	E	F
Date	Interest payment @5.5% p.a	Effective Interest ((Market rate 6% p.a on previous BV in F))	Amortization of bond premium (B-C)	Balance in Discount account	Carrying value of bonds payable
	Credit cash	Debit Int expense
				(74,655)	2,925,345
Jun 30 2015	82,500	87,760.35	(5,260)	(69,394.68)	2,930,605
Dec 31 2015	82,500	87,918.16	(5,418)	(63,976.52)	2,936,023
Jun 30 2016	82,500	88,080.70	(5,581)	(58,395.82)	2,941,604
Dec 31 2016	82,500	88,248.13	(5,748)	(52,647.69)	2,947,352
Jun 30 2017	82,500	88,420.57	(5,921)	(46,727.12)	2,953,273
Dec 31 2017	82,500	88,598.19	(6,098)	(40,628.94)	2,959,371
Jun 30 2018	82,500	88,781.13	(6,281)	(34,347.80)	2,965,652
Dec 31 2018	82,500	88,969.57	(6,470)	(27,878.24)	2,972,122
Jun 30 2019	82,500	89,163.65	(6,664)	(21,214.59)	2,978,785
Dec 31 2019	82,500	89,363.56	(6,864)	(14,351.02)	2,985,649
Jun 30 2020	82,500	89,569.47	(7,069)	(7,281.55)	2,992,718
Dec 31 2020	82,500	89,781.55	(7,282)	0.00	3,000,000

Bond B	3000000
Facevalue (f) per unit	100
Coupon rate ©	5.5%
Yield rate (i)	6%
Number of coupon payments per year (m)	2
Number of years till maturity (n)	6
Bond Value = {c/m*f*((1-(1+i/m)^-n*m)/(i/m))}+(f/(1+(i/m))^n*m)
c/m	0.0275
Facevalue -F	100.00
C/M*F	2.75
(1-(1+i/m)^-n*m)	0.30
i/m	3%
(1-(1+i/m)^-n*m)/(i/m))	9.95
(1+(i/m))^n*m)	1.43
(f/(1+(i/m))^n*m)	70.14
Bond value per unit	97.51
Bond value or Carrying value = 3,000,000/100*97.51	2,925,344.97

Amortization table for Bond C:

Zero coupon bond @4%

Carrying value = 4,000,000*PVF at 4% for 10 years = 4,000,000*0.6755 = 2,702,256.68

Year	Interest expense	Carrying value at beginning of the year	Carrying value at end of the year
1	108,090.27	2,702,256.68	2,810,346.94
2	112,413.88	2,810,346.94	2,922,760.82
3	116,910.43	2,922,760.82	3,039,671.25
4	121,586.85	3,039,671.25	3,161,258.10
5	126,450.32	3,161,258.10	3,287,708.43
6	131,508.34	3,287,708.43	3,419,216.76
7	136,768.67	3,419,216.76	3,555,985.43
8	142,239.42	3,555,985.43	3,698,224.85
9	147,928.99	3,698,224.85	3,846,153.85
10	153,846.15	3,846,153.85	4,000,000.00

2. Journal entries for 2017:

Jan 1. Cash account Dr 5,132,191.77

To Premium on Bonds Payable 132,191.77

To Bonds Payable 5,000,000.00

(To record Bond A Issued at a premium)

Jun 30. Interest expense Dr 102,643.84

Premium on Bonds payable Dr 9,756.16

To Cash 112,500

(To record interest paid on Bond A)

Jun 30 Interest expense Dr 88,420.57

To Discount on Bonds Payable 5,920.57

To Cash 82,500.00

(To record Interest paid on Bond B)

Dec 31

Interest expense Dr 102,446.71

Premium on Bonds payable Dr 10,053.29

To Cash 112,500

(To record interest paid on Bond A)

Dec 31 Interest expense Dr 88,598.19

To Discount on Bonds Payable 6,098.19

To Cash 82,500.00

(To record Interest paid on Bond B)

3. Adjusting journal entry to record Interest expense on Bond C:

Dec 31 Interest expense Dr 112,413.88

To Bonds Payable 112,413.88

4. Financial Statements:

Long Term Liabilities:

Bond A 5,000,000.00

Add: Unamortized premiums on Bonds Payable 112,282.31 5,112,282,31

Bond B 3,000,000.00

Less: Unamortized discounts on Bonds Payable 52,647.69 2,947,352.31

Bond C 2,922,760.82

Income Statement:

Interest and Depreciation:

Interest expense 502,413.88

Statement of Cash flows:

Under Cash flows from Financing activities:

Increase in Bonds Payable

Bond A 5,122,282.31

Bond B 5,920.57

Bond C 112,413.88 5,230,616.76