Question

The following information relates to the issuance of bonds by Wee Piow Ltd on 1 January 20X1. Assume that the firm has 31 December year-ends.

Face value                                           $200,000
Stated interest rate                              4%
Market interest rate                             5%

Interest payments                                Annual
First interest payment                         31 December 20X1

Maturity date                                      31 December 20X5

1. Wee Piow Ltd amortises bonds by the effective interest method. Prepare a bond amortisation table for the five-year period.

2. Illustrate by preparing journal entries on issuance date and on the first interest payment date based on FRS 39 Financial Instruments.

Answer 1

Since market interest rate is higher that coupon rate, bonds must have been issued at discount. We can find the issue price of the bond by:

PV of Face Value of $200,000 + PV of coupon payments of $8,000

PV of bond=P/[(1+r)^n], P=face value, r=ROI=5%, n= term=5years

=200000/[(1+0.05)^5}

=200000/[1.05^5]=200000/1.2763=$156,705.23

PV of Coupon payments=A*{[1-(1+r)^-n]/r}, A=Annual Coupon payments=$8,000, r=ROI=5%, n= term=5years

=8000{[1-(1+0.05)^-5]/0.05}

=8000{[1-(0.7835]/0.05}

=8000(0.2165/0.05)
=8000(4.3295)

=$34,635.81

Present Value of Bond=156705.23+34635.81=$191,341

a)Bond Amortisation Table:

A	B	C	D	E	F	G
DATE	INT PAYMENT(FACE VAL*4%)	INTEREST EXPENSE(PREVIOUS BOOK VAL IN G*5%)	AMORTISATION(C-B)	BALANCE IN DISCOUNT(BALANCE PREM-D)	FACE VALUE	BOOK VALUE(PREV BOOK VAUE+D)
End of Yr				8659	200000	191341
1	8000	9567	1567	7092	200000	192908
2	8000	9645	1645	5447	200000	194553
3	8000	9728	1728	3719	200000	196281
4	8000	9814	1814	1905	200000	198095
5	8000	9905	1905	0	200000	200000

b)

In the books of M/s Wee Piow Ltd
Journal
Date	Particulars	Dr($)	Cr($)
01-Jan-x1	Cash A/c	191,341
	Discount on Bonds Payable A/c	8,659
	To Bond Payable A/c		200,000
	(Being issue of Bonds at Discount)
31-Jan-x1	Interest Expense A/c	9,567
	To Interest on Bonds Payable A/c		8,000
	To Discount on Bonds Payable A/c		1,567
	(Being payment for 1st interest on bonds)
31-Jan-x1	Interest on bonds payable A/c	8,000
	To Cash A/c		8,000
	(Being Cash A/c payment of interest on bonds)

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