Question
In: Accounting
Problem 1 Company: XYZ Company Date of bonds:  
Problem 1
Company: XYZ Company
Date of bonds: January 1, 2019
Term: 4 years
Face (Par) Value: $1,000
Stated interest rate: 10%
Effective interest rate: 12%
Interest payment dates on January 1 and July 1
- Compute the market price of the bonds and journalize the issuance of the bonds.
- Prepare a schedule to amortize the premium or discount using the effective interest method of amortization for the first year and journalize the entries to record the interest payment on July 1, 2019 and January 1 2020.
- Interest expense for the year ended December 31, 2019 is $______________.
Solutions
Expert Solution
Market
interest rate = 12%
Market
interest rate for a semiannual period = 12% / 2 = 6%
r = 0.06
(per semiannual period),
n = 8
(semiannual periods)
Present value of
principal
= $1,000 x
Present value factor for a single payment (6%, 8
periods)
= $1,000 x
0.6274
=
$627
Interest
payment each semiannual period
= $1,000 x
5%
=
$50
(Coupon
rate for a semiannual period = 10% / 2 = 5%.)
Present value of interest
payments
= Interest
payment each semiannual period
x Present value factor for an ordinary annuity (6%, 8
periods)
= ($1,000
x 5%) x 6.2098
=
$310
Price of
bonds
= Present
value of principal + Present value of interest
payments
= $627 +
$310
=
$937
The bonds
will be sold at a
$63discount from the face
amount.
($1,000 -
$937 = $63)
Journal Entry for Issuance :
Dr. Cash 937
Dr. Discount 63
Cr. Bonds Payable 1,000
| Date | Interest paid | Effective interest rate for semiannual period | Interest expense | Amortization of discount | Present value of bonds | |
| 1/1/2019 | $937 | |||||
| 7/1/2019 | $50 | 6% | $56 | $6 | $943 | |
| 1/1/2020 | $50 | 6% | $57 | $7 | $950 | |
| 7/1/2020 | $50 | 6% | $57 | $7 | $957 | |
| 1/1/2021 |
|
6% | $58 | $8 | $965 | |
| 7/1/2021 |
|
6% | $58 | $8 | $973 | |
| 1/1/2022 |
|
6% | $58 | $8 | $981 | |
| 7/1/2022 |
|
6% | $59 | $9 | $990 | |
| 1/1/2023 |
|
6% | $60 | $10 | $1,000 | |
Journal Entry on 7/1/2019:
a) Dr. Interest Exp. 50
Cr. Cash 50
b) Dr. Interest exp. 6
Cr. Bond discount 6
Journal Entry on 1/1/2020:
a) Dr. Interest Exp. 50
Cr. Cash 50
b) Dr. Interest exp. 7
Cr. Bond discount 7
Interest Expense for the year ended December 31,2019 is $ 56
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