In: Accounting
1. A company issues a bond with a face value of $500,000, coupon rate of 4.5% and term of five years. Make the entries to record the issue of the bond, payment of the first interest payment due and payoff of the bond at maturity under each of the following conditions:
a. Referring to the long term bond provided in the quiz preparation document: enter the amount that will be received by the company if the market interest rate on the bond is 7.0% (round to the nearest dollar; do not use dollar signs)
b. Enter the values that will be recorded in each of the following accounts for an interest payment on the bond if the market rate is 7.0%. If no entry is made into the account, enter a (number) 0. Round your answer to the nearest dollar; use commas but no dollar signs in your answer
-Cash
-Interest Expense
-Premium on long term debt
-Discount on long term debt
-Long term debt
c. Referring to the long term bond provided in the quiz preparation document: enter the amount that will be received by the company if the market interest rate on the bond is 3.5% (round to the nearest dollar; do not use dollar signs)
d. Enter the values that will be recorded in each of the following accounts for an interest payment on the bond if the market rate is 3.5%. If no entry is made into the account, enter a (number) 0. Round your answer to the nearest dollar; use commas but no dollar signs in your answer
-Cash
-Interest Expense
-Premium on long term debt
-Discount on long term debt
-Long term debt
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A company |
Answer 1 a |
As market interest rate is (7%) is greater than coupon rate (4.5%) so bonds are issued at discount. |
Book value of bonds | 500,000.00 |
Coupon rate | 4.50% |
Annual Interest | 22,500.00 |
Issue price of bonds | See C | D | E=C*D | |
Period | Particulars | Cashflow | PV factor at 7% | Present value |
Period 1 | Annual Interest | 22,500.00 | 0.934579439 | 21,028.04 |
Period 2 | Annual Interest | 22,500.00 | 0.873438728 | 19,652.37 |
Period 3 | Annual Interest | 22,500.00 | 0.816297877 | 18,366.70 |
Period 4 | Annual Interest | 22,500.00 | 0.762895212 | 17,165.14 |
Period 5 | Annual Interest | 22,500.00 | 0.712986179 | 16,042.19 |
Period 5 | Annual Interest | 500,000.00 | 0.712986179 | 356,493.09 |
Present value of cash outflows | 448,748.00 | |||
So issue price of bonds is $ 448,748. |
Answer 1 b | ||
Par value of bonds | 500,000.00 | G |
Issue value | 448,748.00 | H |
Unamortized discount | 51,252.00 | I=G-H |
Amortization schedule | A | B | C=B-A | D=D-C | E | F=E-D |
Date | Interest payment at 4.5% | Interest expense at 7% | Amortization of bond discount | Debit balance in bond discount | Credit balance in bonds payable | Book value of bonds |
Credit Cash | Debit Interest expense | Credit bond discount | ||||
Jan 1 2020 | 51,252.00 | 500,000.00 | 448,748.00 | |||
First interest payment | 22,500.00 | 31,412.00 | 8,912.00 | 42,340.00 | 500,000.00 | 457,660.00 |
Journal entry | |||
Date | Account | Debit $ | Credit $ |
First interest payment | Interest expense | 31,412.00 | |
Discount on long term debt | 8,912.00 | ||
Cash | 22,500.00 |
Answer 2 a |
As market interest rate is (3.5%) is less than coupon rate (4.5%) so bonds are issued at premium. |
Issue price of bonds | See C | D | E=C*D | |
Period | Particulars | Cashflow | PV factor at 3.5% | Present value |
Period 1 | Annual Interest | 22,500.00 | 0.966183575 | 21,739.13 |
Period 2 | Annual Interest | 22,500.00 | 0.9335107 | 21,003.99 |
Period 3 | Annual Interest | 22,500.00 | 0.901942706 | 20,293.71 |
Period 4 | Annual Interest | 22,500.00 | 0.871442228 | 19,607.45 |
Period 5 | Annual Interest | 22,500.00 | 0.841973167 | 18,944.40 |
Period 5 | Annual Interest | 500,000.00 | 0.841973167 | 420,986.58 |
Present value of cash outflows | 522,575.00 | |||
So issue price of bonds is $ 522,575. |
Answer 2 b | ||
Par value of bonds | 500,000.00 | G |
Issue value | 522,575.00 | H |
Unamortized premium | 22,575.00 | I=H-G |
Bond amortization schedule | A | B | C=A-B | D=D-C | E | F=E+D |
Date | Interest payment at 4.5% | Interest expense at 3.5% | Amortization of bond Premium | Credit balance in bond Premium | Credit balance in bonds payable | Book value of bonds |
Credit Cash | Debit Interest expense | Debit bond premium | ||||
Jan 1 2020 | 22,575.00 | 500,000.00 | 522,575.00 | |||
First interest payment | 22,500.00 | 18,290.00 | 4,210.00 | 18,365.00 | 500,000.00 | 518,365.00 |
Journal entry | |||
Date | Account | Debit $ | Credit $ |
First interest payment | Interest expense | 18,290.00 | |
Premium on long term debt | 4,210.00 | ||
Cash | 22,500.00 |