Question

On January 1, 2016, Trueman Corp. issued $600,000 of 20-year, 11% bonds for $554,860, Yielding a market ( yield) rate of 12%. Interest is payable semiannually on June 30 and December 31.

a) Confirm the bond issue price.

b) Prepare journal entries to record the bond issuance, semiannual interest payment and discount amortization on June 30, 2016, and semiannual interest payment and discount amortization on December 31, 2016. Use the effective interest rate method.

c) Post the Journal entries from part b) to their respective T-accounts

d) Trueman elected to report these bonds in its financial statements at fair value.

On December 31, 2016, these bonds were listed in the bond market at a price of 101 ( or 1015 of par value)

What entry is required to adjust the reported value of these bonds to fair value?

e) Prepare a table summarizing the effect of these bonds on earnings for 2016

Answer 1

(A) . Intrinsic value or to be value of bond will be present value of coupon discounted at yield rate + present value of terminal value

Note that coupon is payable semiannually for the period of 20 years.

Therefore, we have interest rate as 12%/2=6%

Also semiannual coupon payment = 600000x5.5% =33000

And number of period as 20 years x 2 = 40

Thus present value of bond = 33000xpvaf(40,6%)+600000xpvif(40,6%)

=33000x15.0463+600000x0.0972

=554860

(B) Journal entries for recording issue, interest and discount amortization as on 30 June and Dec are

Date	Account name	Debit	Credit
January 1, 2016	Bank A/c Discount on bonds payable To Bonds payable (Being bonds issued at discount)	554860 45140	600000
June 30, 2016	Interest expense To Discount on bonds payable To cash (Being interest paid and discount amortized by transferring it to int. Exp.)	34128.5	1128.5 33000
December 31, 2016	Interest expense To Discount on bonds payable To cash (Being int paid and discount amortized by transferring it to int)	34128.5	1128.5 33000

(C). Following are the T accounts :-

Bond payable

Date	particulars	debit	date	particulars	credit
Dec 31, 2016	by bal c/d	600000	January 1, 2016	By bank	554860
			January 1, 2016	By discount on bonds payable	45140

Interest on bonds payable

Date	particulars	debit	date	particular	credit
June 30, 2016	To cash To discount on bonds payable	33000 1128.5	December 31, 2016	By profit & loss	68257
December 31, 2016	To cash To discount on bonds payable	33000 1128.5

Discount on bonds payable

Date	particulars	debit	date	particulars	credit
January 1, 2016	To bonds payable	45140	June 30, 2016	By interest exp	1128.5
			December 21, 2016	By interest exp	1128.5
				By bal c/d	42883

Following will be the journal entry to reflect change in bond price

Date	particulars	debit	credit
Dec 31 2016	unrealized loss on bonds To valuation allowance (Being amount of change recognized)	9000 (600000/1000)x15	9000

Table showing impact of these bonds on earnings for 2016

Particulars	amount
Reserve & surplus	xxx
Less : interest exp	68257