Question

On March 1, 2018, Piper Co. issued 10 year bonds with a face value of $5,000,000 and a stated rate of 10% payable semiannually on September 1 and March 1. The bonds were sold to yield 8%. Piper Co. fiscal year end is December 31.

a) Complete the amortization schedule for the dates indicated using the effective-interest method. Round all answers to the nearest dollar).

March 1,2018

September 1,2018

March 1,2018

b) Prepare the adjusting entry for December 31,2018. Use the effective interest method.

c) Compute the interest expense to be reported in the income statement for the year ended December 31,2018

Answer 1

Calculate the issue price of the bonds as follows:

Face value of bonds	5,000,000
Stated interest rate	10%
Interest paid each semiannual period	250000
Market interest rate	8%
Number of semiannual periods during the life of the bond	20
Present value of interest paid over the life of the bonds	3397500
Present value of face value to be repaid at maturity	2280000
Issue price of the bonds (3397500 + 2280000)	5677500

Above figures have been calculated in the following manner:

Face value of bonds	5000000
Stated interest rate	0.1
Interest paid each semiannual period	=5000000*10%*(1/2)
Market interest rate	0.08
Number of semiannual periods during the life of the bond	=10*2
Present value of interest paid over the life of the bonds	=250000*13.59
Present value of face value to be repaid at maturity	=5000000*0.456
Issue price of the bonds (3397500 + 2280000)	5977500

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a) Complete the amortization schedule for the dates indicated using the effective-interest method as follows:

Date	Cash Interest Paid	Interest Expense	Amortization	Carrying value
3/1/2018				5977500
9/1/2018	250000	239100	10900	5966600
3/1/2019	250000	238664	11336	5955264

Interest expense on 9/1/2018 = 5977500 x 4% = 239100

Amortization on 9/1/2018 = 250000 - 239100 = 10900

Carrying value on 9/1/2018 = 5977500 - 10900 = 5966600

Interest expense on 3/1/2019 = 5966600 x 4% = 238664

Amortization on 3/1/2019 = 250000 - 238664 = 11336

Carrying value on 3/1/2019 = 5966600 - 11336 = 5955264

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b) Prepare the adjusting entry for December 31,2018, as follows:

Date	Account Titles	Debit	Credit
12/31/2018	Interest Expense (5966600 x 8% x 4/12)	159109
	Premium on Bonds Payable	7557
	Interest Payable		166667

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c) Compute the interest expense to be reported in the income statement for the year ended December 31,2018, as follows:

Interest expense to be reported in the income statement = 5966600 x 8% x 4/12 = 159109