Question

On January 1, 2018, Rice Co. issued ten-year bonds with a face value of $5,000,000 and a stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were sold to yield 12%. Table values are:

           

Instructions

1. Calculate the issue price of the bonds.
2. Record the bond issuance
3. Record the first interest payment

Answer 1

As given in question,

Bonds' Face value = $5,000,000

Stated Interest Rate = 10%

Bonds were sold to = 12% yield

Bonds' Term = 10 Years

Interest term = semi annually

Therefore, total no. of periods = 10 * 2 = 20 Periods

Semi annually yield = 12% /2 = 6%

a.) Calculation of Bonds Issue Price:

Bond Issue Price = Present value of Bond price + Present value of Interest on bond

Present value of Bond = Face Value *  Present value of 1 for T periods at Yield rate

= $5,000,000 * ( 1 / (1.06)20)

= $5,000,000 * 0.3118

  = $1,559,024

Present value of Interests = Semi Annually Interest Payment * Sum of NPV factors of 1 for T periods at yield rate

= ($5,000,000 * 10% * 6/12) * 11.46992

= $250000*11.46992

= $2,867,480

Therefore, Issue price of bond = $1,559,024 + $2,867,480

= $ 4,426,503.94 = $4,426,504

b.) Record the bond issuance:

When a bond issuer sells bonds at a discount to their face value, it records a debit to the cash account, a credit to the bonds payable account for the full face value of the bonds, and a debt in the amount of the discount.

	Debit	Credit
Cash	4,426,504
Discount on Bonds Payable	573,496
Bonds Payable		5,000,000

c.) Record the first interest payment:

  Over the life of the bond, the balance in the account Premium on Bonds Payable must be reduced to $0. Reducing the bond premium in a logical and systematic manner is referred to as amortization.

We are using Effective Interest Rate method of Amortization of Bond Discount.

Interest Expense = Bond Issue price * Periodic Yield Rate

= 4,426,504 * 6%

= $265,590

Interest Paid = Face Value * Bond Periodic Interest rate

= $5,000,000 * 10% * 6/12

= $250,000

Bond Discount amortization = Interest Expense - Interest Paid

= $265,590 - $250,000

= $15,590

	Debit	Credit
Interest Expense	265,590
Amortization of Discount on Bonds Payable		15,590
Cash		250,000