Question

In: Accounting

1. A company issues a bond with a face value of $500,000, coupon rate of 4.5%...

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

Solutions

Expert Solution

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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

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