Question

Reed Corp. sells $500,000 of bonds to private investors on January 1, 2020. The bonds are due in five years, have a 8% coupon rate, and interest is paid semi-annually on June 30 and December 31. The bonds were sold to yield 6%.

Required:

1 Determined the bond issue prince.

2 Prepare journal entry to record the interest payment on June 30, 2020.

3 Prepare journal entry to record the interest payment on December 31, 2020.

4 What was the bond interest expense reported in Reed’s 2020 income statement?

5 How would the bonds be reported on the balance sheet on December 31, 2020, the fiscal year-end?

Answer 1

All amounts are in $

Coupon = 8%

Semi annual coupon payment = 500,000 x 8% X1/2

= 20,000

Yield = 6% per annum

Yield per period (semi annual) = 3%

Total Semi Annual periods = 5 x 2 = 10

PVIFA(3%,10periods) = 8.530202837

PVIF(3%,10thperiod) = 0.74409

(1)

Bond price = 8.530202837 x 20,000 + 0.74409 x 500,000

= 170,604 + 372,045

= 542,649

(2)

Interest Expense 16,279.47

Premium on bonds 3,720.53

Interest Payable/Cash 20,000

Workings :

Interest Expense = 542,649 x 3% = 16,279.47

Premium Amortization = 20,000 - 16,279.47 = 3,720.53

(3)

Interest Expense 16,167.85

Premium on bonds 3,832.15

Interest Payable/Cash 20,000

Workings :

Interest Expense = (542,649-3,720.53) x 3% = 16,167.85

Premium Amortization = 20,000 - 16,167.85 = 3,832.15

(4)

Interest Expense for the year = 16,167.85 + 16,279.47

= 32,447.32

(5)

On Balance Sheet at 31st December 2020

Under Equity and Liability Side of Balance Sheet

Under Long-term Liabilities

1. Bonds Payable = 500,000

2. Premium on Bonds Payable = 35,096.32

(42,649-3,720.53-3,832.15 = 35,096.32)