In: Accounting
West Gate Motor Homes Inc. Issued bonds with a par value of $680,000 and a five-year life on January 1, 2019. The bonds pay interest on June 30 and December 31. The contract interest rate is 8%. The market interest rate was 9% on the original issue date.
Required
1. Calculate the issue price and the total bond interest expense
over the life of the bonds.
2. Prepare an amortization table using the effective interest
method similar to Exhibit 14.10
3. Show the journal entries that Westgate would make to record
the first two interest payments. Assume a December 31 year
end.
4. Use the original market interest rate to calculate the present
value of the remaining cash flows for these bonds as of December
31, 2021. Compare your answer with the amount shown on the
amortization table as the balance for that date and explain your
findings
Answer 1
Coupon rate per Period (8%/2) | 4.00% |
Face value of bond | $ 680,000 |
Market rate per Period (9%/2) | 4.50% |
Interest paid (680000*4%) | $ 27,200 |
Interest paid on | Semi annually |
Number of period (5*2) | 10 |
Market rate per Period used for PV factor. | ||
Market rate per Period | 4.50% | |
Period | PV factor | PVA factor |
1 | 0.95694 | 0.95694 |
2 | 0.91573 | 1.87267 |
3 | 0.87630 | 2.74896 |
4 | 0.83856 | 3.58753 |
5 | 0.80245 | 4.38998 |
6 | 0.76790 | 5.15787 |
7 | 0.73483 | 5.89270 |
8 | 0.70319 | 6.59589 |
9 | 0.67290 | 7.26879 |
10 | 0.64393 | 7.91272 |
Amount | Multiply: PV factor | Present value | |
Face value | $ 680,000 | 0.64393 | $ 437,872 |
Interest paid | $ 27,200 | 7.91272 | $ 215,226 |
Issue price of bonds (Total of above) | $ 653,098 | ||
Less: face value of Bond | $ 680,000 | ||
Discount on Bond payable | $ 26,902 | ||
Add: Cash interest paid (27200*10) | $ 272,000 | ||
Total bond interest expense over the life of the bonds | $ 298,902 |
Answer 2
Interest payment (Credit Cash) = Face value of bond * Coupon rate | |||||||
Interest Expense (Debit Interest Expense) = book value of Bond for previous period * Market or Discounting rate | |||||||
Amortization of bond Discount (Credit Bond Discount) = Interest Expense - Interest payment | |||||||
Debit Balance in Bond Discount = Debit Balance in Bond Discount for previous period - Amortization of bond Discount | |||||||
Credit Balance in Bond Payable = Face value of bond | |||||||
Book value of Bond = Credit Balance in Bond Payable - Debit Balance in Bond Discount | |||||||
Bond Discount Amortization Table | |||||||
Debit Balance in Bond Discount at end of retirement of bond payable must be Zero. | |||||||
Period | Date | Interest payment | Interest Expense | Amortization of bond Discount | Debit Balance in Bond Discount | Credit Balance in Bond Payable | Book value of Bond |
0 | Jan 1, 2019 | 26,902 | 680,000 | 653,098 | |||
1 | June 30, 2019 | 27,200 | 29,389 | 2,189 | 24,712 | 680,000 | 655,288 |
2 | Dec 31, 2019 | 27,200 | 29,488 | 2,288 | 22,424 | 680,000 | 657,576 |
3 | June 30, 2020 | 27,200 | 29,591 | 2,391 | 20,033 | 680,000 | 659,967 |
4 | Dec 31, 2020 | 27,200 | 29,699 | 2,499 | 17,535 | 680,000 | 662,465 |
5 | June 30, 2021 | 27,200 | 29,811 | 2,611 | 14,924 | 680,000 | 665,076 |
6 | Dec 31, 2021 | 27,200 | 29,928 | 2,728 | 12,195 | 680,000 | 667,805 |
7 | 27,200 | 30,051 | 2,851 | 9,344 | 680,000 | 670,656 | |
8 | 27,200 | 30,180 | 2,980 | 6,365 | 680,000 | 673,635 | |
9 | 27,200 | 30,314 | 3,114 | 3,251 | 680,000 | 676,749 | |
10 | 27,200 | 30,451 | 3,251 | 0 | 680,000 | 680,000 |
Answer 3
Journal entries | |||
Date | Account title | Debit | Credit |
Jan 1, 2019 | Cash | $ 653,098 | |
Discount on Bond payable | $ 26,902 | ||
Bond payable | $ 680,000 | ||
(To record issued of bond payable at Discount.) | |||
June 30, 2019 | Interest expense | $ 29,389 | |
Discount on Bond payable | $ 2,189 | ||
Cash | $ 27,200 | ||
(To record interest expense and amortization of bond Discount.) | |||
Dec 31, 2019 | Interest expense | $ 29,488 | |
Discount on Bond payable | $ 2,288 | ||
Cash | $ 27,200 | ||
(To record interest expense and amortization of bond Discount.) |
Answer 4