Question

Analyzing and Reporting Financial Statement Effects of Bond TransactionsOn January 1, 2017, Shields Inc. issued $1,000,000 of 9%, 20-year bonds for $1,098,964, yielding a market (yield) rate of 8%. Semiannual interest is payable on June 30 and December 31 of each year. a. Show computations to confirm the bond issue price. b. Indicate the financial statement effects using the template for (1) bond issuance, (2) semiannual interest payment and premium amortization on June 30, 2017, and (3) semiannual interest payment and premium amortization on December 31, 2017

Answer 1

a

Bond price

	Particulars	Cash flow	Discount factor	Discounted cash flow
	Interest payments-Annuity (4%,40 periods)	45,000.0	19.7928	890,674.82
	Principle payments -Present value (4%,40 periods)	1,000,000	0.2083	208,289.04
A	Bond price			1,098,963.87
	Face value			1,000,000.00
	Premium/(Discount)			98,963.87
	Interest amount:
	Face value	1,000,000
	Coupon/stated Rate of interest	9.00%
	Frequency of payment(once in)	6 months
B	Interest amount	1000000*0.09*6/12=		45000
	Present value calculation:
	yield to maturity/Effective rate	8.00%
	Effective interest per period(i)	0.08*6/12=		4.000%
	Number of periods:
Ref	Particulars	Amount
a	Number of interest payments in a year	2
b	Years to maturiy	20.0
c=a*b	Number of periods	40

b

(1)

Date		Account		Debit	Credit
Jan.1	1	Cash		1,098,963.87
		Premium on bonds payable			98,963.87
		Bonds payable			1,000,000.00
		[bonds issued at premium]

July.1	1	Interest expense		43,958.55
		Premium on bonds payable		1,041.45
		Cash			45,000.00
		[Interest paid]
Dec.31	1	Interest expense		43,916.90
		Premium on bonds payable		1,083.10
		Interest payable			45,000.00

Period		Beginning carrying value	Interest expense	Interest paid	Premium amortisation	Ending carrying value
Year	Month end	A	C= A* 4.00%	D	E=C-D	F=A+E
2017	6.00	1,098,963.87	43,958.55	45,000.00	1,041.45	1,097,922.42
2017	12.00	1,097,922.42	43,916.90	45,000.00	1,083.10	1,096,839.32