Obsidian Mining, Inc. issued a series of 5.2%, $200,000 bonds on April 1, 2020. The bonds...

Obsidian Mining, Inc. issued a series of 5.2%, $200,000 bonds on April 1, 2020. The bonds will pay interest semi-annually on September 30 and March 31 and mature in 10 years. At the time of issuance, the market rate of interest was 4.8%.

Instructions

Record the journal entry for the issuance of the bonds on April 1, 2020.
Record the journal entry for the first interest payment on September 30, 2020.
Record the year-end accrual for interest on December 31, 2020.
What is the total cash paid for interest by Obsidian over the life of the bonds?
What is the total effective interest expense recognized by Obsidian over the life of the bonds?
Assume that Obsidian retires the bonds at 101 immediately after the 8th interest payment, when the carrying value of the bonds is $204,128. Record the journal entry to retire the bonds.

Expert Solution

Semi annual cash interest = 2000005.20%6/12 =	5200

n = 20
I = 2.40%

Cashflows		Amount $	PVF	Present value
Semi annual cash interest	5200	15.73744	81834.69
Maturity amount		200000	0.622302	124460.4
Price of bonds				206295.1

Amort Chart:
Period	Cash int	Int expense	Premium	Unamortized	Carrying
			amortized	Premium	value of bonds
01.04.20				6295	206295
30.09.20	5200	4951	249	6046	206046
31.03.21	5200	4945	255	5791	205791
30.09.21	5200	4939	261	5530	205530
31.03.22	5200	4933	267	5263	205263
30.09.22	5200	4926	274	4989	204989
31.03.23	5200	4920	280	4709	204709
30.09.23	5200	4913	287	4422	204422
31.03.24	5200	4906	294	4128	204128

Journal entries
S.no.	Accounts title and explanations		Debit $	Credit $
01.04.20	Cash account			206295
	Bonds payable				200000
	Premium on bonds payable			6295
	(for issuance of bonds)
30.09.20	Premium on bonds payable		249
	Interest expense			4951
	Cash account				5200
	(for interest expense)
31.12.20	Premium on bonds payable	(255*3/6)	127
	Interest expense		(4945*3/6)	2473
	Interest payable		(5200*3/6)	2600
	(for interest due)

Req d.
Total cash paid for interest over life:
semi annual cash interest		5200
Multiply: Number of periods		20
Total cash paid for interest over life:	104000

Req e.
20 payment of 5200 each	104000
maturity amount paid	200000
Total repayment		304000
Less: Amount borrowed	-206295
Total Interest expense	97705

Req f.
Journal entries
S.no.	Accounts title and explanations		Debit $	Credit $
31.03.24	Bonds payable			200000
	Premium on bonds payable		4128
	Cash account (200000*101%)		202000
	Gain on redemption of bonds		2128
	(for redemption of bonds)

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