Question

I. Company A issues bonds with a par value of $870,000 on their stated issue date. The bonds mature in five years and pay 8% annual interest in semiannual payments.

Assume: On the issue date, the annual market rate for the bonds is 10%.

1. What is the amount of each semiannual interest payment for these bonds? _________________
2. Compute the price of the bonds as of their issue date using either the factor tables or excel formula.    _________________
3. Prepare the journal entry to record the bonds' issuance:
4. Prepare the amortization schedule using the effective interest method of either the Discount or Premium using excel, use the following title and headings, and print it out on one page and include in your packet:

   Company A

   Amortization Schedule (10% Market Rate)

   Periods

   Interest Payments

   Bond Interest Expense

   Discount Amortization

   Unamortized Discount

   Carrying Value

Answer 1

Solution 1:

Amount of each semiannual interest payment for these bonds = $870,000 *8%*6/12 = $34,800

Solution 2:

Computation of bond price
Table values are based on:
n=	10
i=	5%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.613913	$870,000.00	$534,105
Interest (Annuity)	7.721735	$34,800.00	$268,716
Price of bonds			$802,821

Solution 3:

Journal Entries
Event	Particulars	Debit	Credit
1	Cash Dr	$802,821.00
	Discount on issue of bond Dr	$67,179.00
	To Bond Payable		$870,000.00
	(To record issue of bond at discount)

Solution 4:

Bond Amortization Schedule
Period	Interest payments	Bond Interest expense	Discoount Amortization	Unamortized Discount	Carrying Value
0				$67,179	$802,821
1	$34,800	$40,141	$5,341	$61,838	$808,162
2	$34,800	$40,408	$5,608	$56,230	$813,770
3	$34,800	$40,689	$5,889	$50,341	$819,659
4	$34,800	$40,983	$6,183	$44,158	$825,842
5	$34,800	$41,292	$6,492	$37,666	$832,334
6	$34,800	$41,617	$6,817	$30,850	$839,150
7	$34,800	$41,958	$7,158	$23,692	$846,308
8	$34,800	$42,315	$7,515	$16,177	$853,823
9	$34,800	$42,691	$7,891	$8,286	$861,714
10	$34,800	$43,086	$8,286	$0	$870,000