Question

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Texxon Corporation issued $200,000 of 10-year bonds with a payment rate of 6%; payments are made...

Texxon Corporation issued $200,000 of 10-year bonds with a payment rate of 6%; payments are made semiannually.  Assume that the market interest rate for similar investments is 4%, compounded semiannually.  

5. What is the carrying value of the bonds after the first semi-annual interest payment date (i.e., what amount of debt will be left)?

            a.  $231,360.12

            b.  $198.423.88

            c.  $234,768.90

            d.  $196,792.36

            

6.         The journal entry that would be made to record the issue of these bonds would include:

            a.  a debit to Cash for $134,600

            b.  a credit to Bonds Payable for $200,000

            c.  a credit to Premium on Bonds Payable for $98,106

            d.  a credit to Cash for $232,706

7.         The journal entry that would be made when the first payment is made to the bondholders would include:

            a.  a debit to Premium on Bonds Payable for $6,000

            b.  a debit to Cash for $4,000

            c.  a debit to Interest Expense for $4,654.12

            d.  a debit to Discount on Bonds Payable for $1,345.88

            

8.         The journal entry that would be made when the final payment of $200,000 is made to the bondholders would include:

            a.  debit Interest Expense for $4,000

            b.  debit Bonds Payable for $200,000

            c.  credit Cash for $232,706

            d.  debit Premium on Bonds Payable for $32,706

Solutions

Expert Solution

5. Option (a) is correct

First we will calculate the price of the bond as below:

Price of the bond can be calculated by the following formula:

Bond price = Present value of interest payment + Present value of bond payment at maturity

Semi annual bond interest = 6% * $200000 * 1/2 = $6000

Bond interest payments will be semi annual every year, so it is an annuity. Bond payment at maturity is a one time payment. The interest rate that will be used in calculating the required present values will be the semi annual market rate, which is 4% /2 = 2%, with 10*2 = 20 periods.

Now,

First we will calculate the present value of interest payments:

For calculating the present value, we will use the following formula:

PVA = P * (1 - (1 + r)-n / r)

where, PVA = Present value of annuity, P is the periodical amount = $6000, r is the rate of interest = 2% and n is the time period = 20

Now, putting these values in the above formula, we get,

PVA = $6000 * (1 - (1 + 2%)-30 / 2%)

PVA = $6000 * (1 - ( 1+ 0.02)-20 / 0.02)

PVA = $6000 * (1 - ( 1.02)-20 / 0.02)

PVA = $6000 * ((1 - 0.6729713331) / 0.02)

PVA = $6000 * (0.32702866689 / 0.02)

PVA = $6000 * 16.3514333446

PVA = $98108.6

Next, we will calculate the present value of bond payment at maturity:

For calculating present value, we will use the following formula:

FV = PV * (1 + r%)n

where, FV = Future value = $200000, PV = Present value, r = rate of interest = 2%, n= time period = 20

now, putting theses values in the above equation, we get,

$200000 = PV * (1 + 2%)20

$200000 = PV * (1 + 0.02)20

$200000 = PV * (1.02)20

$200000 = PV * 1.48594739598

PV = $200000 / 1.48594739598

PV = $134594.266622

Now,

Bond price = Present value of interest payment + Present value of bond payment at maturity

Bond price = $98108.6 + $134594.266622 = $232703

Now,

Under effective interest method, interest expense is calculated based upon market rate or yield. Here, market rate is 4%, so semi annual rate is 2%. Now,

Interest expense under effective interest method is:

Interest expense = Carrying value at the beginning of the period * Yield

Interest expense = $232703 * 2% = $4654.06

Amortization of bond premium = Interest payment - Interest expense

Amortization of bond premium = $6000 - $4654.06 = $1345.94

End of period net carrying value = $232703 - $1345.94 = $231357.06 approx.

6. Option (b) is correct

Required journal entry is:

Debit Cash $232703

Credit Bonds payable $200000

Credit Premium on bonds payable $32703

7. Option (c) is correct

Required journal entry is:

Debit Interest expense $4654.06

Debit Premium on bonds payable $1345.94

Credit Cash $6000

8. Option (b) is correct

Required journal entry is:

Debit Bonds payable $200000

Credit Cash $200000

ekkarill92 answered 2 years ago
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