Question
In: Accounting
On January 1, 2012, bronco Inc. issued bonds with a face amount of $3,000,000. Brono received...
On
January 1, 2012, bronco Inc. issued bonds with a face amount of
$3,000,000. Brono received proceeds of $3,240,000 upon issuance,
representing a yield on the bonds of 8%. The firm pays $150,000 of
interest on June 30 and $150,000 on December 31 in connection with
these bonds. What was the carrying value of these bonds at December
31, 2012, after the second interest payment?
Solutions
Expert Solution
| Semi-annual Coupon interest rate=150000/3000000= | ||||||
| 5% | ||||||
| Annual Yield = 8% | ||||||
| Semi-annual yield= 8%/2=4% | ||||||
| Carrying value of bonds at issuance=3240000 | ||||||
| Premium on issue to be amortised= 3240000-3000000=240000 | ||||||
| Partial Bond premium amortisation -Effective interest rate method | ||||||
| 1 | 2 | 3 | 4 | 5 | 6 | 7 |
| Date | Stated int.payment | Interest expense | Amortisation of bond premum | Credit balance in Prem. a/c | Cr. Bal.in bonds payable a/c | Carrying Value of the bonds |
| (FV*5%) | (Prev. carrying value in col.7 *4%) | (3-2) | Prev. Bal. in Col. 5- current col.4 | (5+6) | ||
| Jan 1,2012 | 240000 | 3000000 | 3240000 | |||
| 30-Jun | 150000 | 129600 | -20400 | 219600 | 3000000 | 3219600 |
| Dec 31,2012 | 150000 | 128784 | -21216 | 198384 | 3000000 | 3198384v |
| Journal entries | |||
| Date | Account Titles | Debit | Credit |
| Jan 1,2012 | On Issue | ||
| Cash | 3240000 | ||
| Bonds payable | 3000000 | ||
| Premium on bonds payable | 240000 | ||
| 30-Jun-12 | 1st Interest payment | ||
| Interest expense | 129600 | ||
| Premium on bonds payable | 20400 | ||
| Cash | 150000 | ||
| 31-Dec-12 | 2nd Interest payment | ||
| Interest expense | 128784 | ||
| Premium on bonds payable | 21216 | ||
| Cash | 150000 | ||
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