Question

Horngren financial and managerial accounting 6th edition

Chapter 12, question 37

P12AB-37A

Brad Nelson Inc. issued $600,000 of 7% six year bonds payable on January 1, 2018. The market interest rate at date of issuance was 6% and the bonds pay interest semiannually.

a. How much cash did the company receive upon issuance of bonds payable.

b. Prepare amortization table for the bond using the effective interest method, through the first two interest payments.

c. journalize the issuance of the bonds on January 1, 2018 and the first and second payments of the semiannual interest amount and amortization of the bonds on June 30, 2018 and December 20, 2018. No explanations required.

Answer 1

Ans: Value of bond= 600,000

Coupon interest rate= 7%

Market rate= 6%

Semi annual coupon interest rate= 3.5%

Semi annual Interest payment= 600,000*3.5%

=> 21,000

Maturity time= 6 year

Issue price of bond= Present value of future interest payments+ ( present value of bind repayment)

PVF for 3%@end of 12th year will be 0.7014

PVFA for 3%for 12 periods is 9.954** (note:**= using PVIF table)

Issue price= (21,000*9.954)+ 600,000*0.714

Issue price= 209,034+ 428,400

Issue price= 637,434

B). Amortization table

Period	Semi-annual Payment	Interest expense@3%	Premium un amortized	Un amortized premium	Carrying value of bond
01/01/2018				37,434	637,434
30/06/2018	21,000	19,123.02*	1,876.98**	35,557.02	635,557.02***
31/12/2018	21,000	19,066.71	1,933.29	33,623.73	633,623.73

*= 637,434*3%: 19,123.02

**= 21,000-19,123.02:1,876.98

***= 637,434-1,876.98= 635,557.02

C). Journal Entry

Date	Account title and explanation	Debit($)	Credit($)
01-01-2018	Cash	637,434
	Bond payable		600,000
	Premium on bond payable		37,434
	( to record issuance of bonds)
30-06-2018	Interest expense	19,123.02
	Premium on bonds payable	1,876.98
	cash		21,000
	( to record first payment of semi-annual interest)
31-12-2018	Interest expense	19,066.71
	Premium on bonds payable	1,933,29
	Cash		21,000
	( to record payment of second semi-annual interest)