Question

In: Accounting

Vadercat Limited issued $50 million 7.5 percent, 10 year bonds on October 1, 2019. The market...

Vadercat Limited issued $50 million 7.5 percent, 10 year bonds on October 1, 2019. The market rate of interest on the date of the issue was 8 percent. Interest is payable semi-annually on April 1 and October 1. The company’s year-end is December 31.

Required:

a. Prepare journal entries to record all transactions during the first year the bonds are outstanding. The company uses the straight-line method of amortizations.

b. Indicate how the bond obligation would be shown on the company’s year-end statement of financial position.

c. How much interest expense is shown on the 2019 year end income statement?

d. How much interest expense will be shown on the 2020 year end income statement?

Solutions

Expert Solution

Carrying Value of the bond = $50 million * 3.75% * PVAF (4%, 20) + $50 million * PVF(4%,20)

= $50 million * 3.75% * 13.59033 + $50 million * 0.45639

= $48,301,209

Discount on issue of Bond = $50,000,000 - $48,301,209 = $1,698,791

Amortization of Discount per period = $1,698,791/ 20 periods = $84,940

Amortization of Discount for the period Oct 19 to Dec 19 = $42,470

Stated Interest per period = $50 million * 3.75% = $1,875,000

Stated Interest for the period Oct 19 to Dec 19 = $937,500

a. Journal entries

Date Accounts Debit Credit
Oct 1, 2019 Cash 48,301,209
Bonds Discount 1,698,791
Bonds Payable 50,000,000
(to record issue of bond)
Dec 31, 2019 Interest expense 979,970
Bond discount 42,470
Interest payable 937,500
(to record interest exp and amortization of discount for the period Oct 19 to Dec 19)

b. Bond obligation shown on the company’s year-end statement of financial position.

Particulars Amount
Non Current Liabilities
Bond payable 50,000,000
Less: Bond Discount 1,656,321
Net payable 48,343,679

c. Total interest expense shown on the 2019 year end income statement = $979,970

d. Total interest expense to be shown on the 2020 year end income statement

  • Stated Interest = 3,750,000
  • Bond amortization = 169,880

Total interest expense = $3,919,880

For any clarification feel free to comment. Kindly Up Vote.

ekkarill92 answered 2 years ago
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