Question

. Collins Company issues term bonds with a face value of $100,000 on January 1, Year One. The bonds have an annual stated rate of interest of 4 percent and a life of ten years. They pay interest semiannually on June 30 and December 31. The bonds were issued to yield an effective annual interest rate of 6 percent. The present value of $1 in 10 periods at a 4 percent interest rate is $0.67556, in 10 periods at 6 percent interest is $0.55839, in 20 periods at a 2 percent interest rate is $0.67297, and in 20 periods at a 3 percent interest rate is $0.55368. The present value of an ordinary annuity of $1 for 10 periods at a 4 percent interest rate is $8.11090, for 10 periods at 6 percent interest is $7.36009, for 20 periods at a 2 percent interest rate is $16.35143, and in 20 periods at a 3 percent interest rate is $14.87747. a. Prepare the journal entry to record the issuance of the bonds on January 1, Year One. b. Prepare the journal entry to record the first payment of interest on June 30, Year One. c. Prepare the journal entry to record the second payment of interest on December 31, Year One. d. What amount of interest expense is reported on the Year One income statement? e. What is the liability balance to be reported for this bond on a December 31, Year One, balance sheet?

Answer 1

Bonds Face Value = $100,000

Stated Interest Rate on Coupon per year = 4%

Stated Interest Rate on Coupon per semiannual period = 4% / 2 = 2%

Market Interest Rate on Bonds per year = 6%

Market Interest Rate on Bonds per semiannual period = 6% / 2 = 3%

Cash Interest Paid per semiannual period = $100,000 x 2%

...................................................................= $2,000

No. of semiannual Period = 2 x 10 years = 20 periods

Cash Received by issuing the bonds = [Cash Interest x PVAF(3%, 20 )] + [Bonds Face Value x PVIF(3%, 20)]

...........................................................= [$2,000 x 14.87747] + [$100,000 x 0.55368]

...........................................................= $29,755 + $55,368

...........................................................= $85,123

a. Prepare the journal entry to record the issuance of the bonds on January 1, Year One.

Date	Account Title and Explanation	Debit	Credit
Year 1
1-Jan	Cash	$85,123
	Discount on Bonds Payable	$14,877
	Bonds Payable		$100,000
	(To record issue of bonds payable)

b. Prepare the journal entry to record the first payment of interest on June 30, Year One

Date	Account Title and Explanation	Debit	Credit
Year 1
30-Jun	Interest Expense ($85,123 x 3%)	$2,554.00
	Discount on Bonds Payable ($2,554 - $2,000)		$554.00
	Cash		$2,000.00
	(To record the payment of interest)

c. Prepare the journal entry to record the second payment of interest on December 31, Year One.

Date	Account Title and Explanation	Debit	Credit
Year 1
31-Dec	Interest Expense [($85,123 + $554) x 3%]	$2,570.00
	Discount on Bonds Payable ($2,570 - $2,000)		$570.00
	Cash		$2,000.00
	(To record the payment of interest)

d. What amount of interest expense is reported on the Year One income statement?

Amount of Interest Expense for the year = $2,554 + $2,570

.................................................................= $5,124

e. What is the liability balance to be reported for this bond on a December 31, Year One, balance sheet?

Liability balance to be reported on 31st December = ($85,123 + $554 + $570)

................................................................................= $86,247