In: Accounting
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 6%.
Company A
Amortization Schedule (6% Market Rate)
Periods |
Interest Payments |
Bond Interest Expense |
Discount Amortization |
Unamortized Discount |
Carrying Value |
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= | 3% | ||
Cash flow | Table Value | Amount | Present Value |
Par (Maturity) Value | 0.744094 | $870,000.00 | $647,362 |
Interest (Annuity) | 8.530203 | $34,800.00 | $296,851 |
Price of bonds | $944,213 |
Solution 3:
Journal Entries | |||
Event | Particulars | Debit | Credit |
1 | Cash Dr | $944,213.00 | |
To Bond Payable | $870,000.00 | ||
To Premium on issue of bond | $74,213.00 | ||
(To record issue of bond at Premium) |
Solution 4:
Bond Amortization Schedule | |||||
Period | Interest payments | Bond Interest expense | Premium Amortization | Unamortized Premium | Carrying Value |
0 | $74,213 | $944,213 | |||
1 | $34,800 | $28,326 | $6,474 | $67,739 | $937,739 |
2 | $34,800 | $28,132 | $6,668 | $61,072 | $931,072 |
3 | $34,800 | $27,932 | $6,868 | $54,204 | $924,204 |
4 | $34,800 | $27,726 | $7,074 | $47,130 | $917,130 |
5 | $34,800 | $27,514 | $7,286 | $39,844 | $909,844 |
6 | $34,800 | $27,295 | $7,505 | $32,339 | $902,339 |
7 | $34,800 | $27,070 | $7,730 | $24,609 | $894,609 |
8 | $34,800 | $26,838 | $7,962 | $16,647 | $886,647 |
9 | $34,800 | $26,599 | $8,201 | $8,447 | $878,447 |
10 | $34,800 | $26,353 | $8,447 | $0 | $870,000 |