Question

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

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