Question

Gupta Corporation issued four-year, 12% bonds with a total face value of $800,000 on January 1, 2018. Interest is paid semi-annually on June 30 and December 31. The market rate of interest on this date was 8%. Gupta uses the effective interest rate method.

Required:

Using Excel, determine the proceeds of the bond sale on 1/1/18.

Using the present value of a dollar table (found in Appendix E of your text), what factor would you use to calculate the present value of the face value of the bond? In other words, what factor would you use to calculate the present value of the $800,000 face value that will be paid to the bondholders upon maturity of the bond?

Using the present value of an ordinary annuity table (found in Appendix E of your text), what factor would you use to calculate the present value of the coupon payments?

Demonstrate that the PV amount you would get using the factors your identified in #2 and #3 gives you the same proceeds of the bond sale as you calculated using Excel in #1. Note that you might be off by a few cents due to rounding.

Did this bond sell at a premium or discount? In 1-2 sentences explain why it sold at a premium or discount.

Using Excel, prepare a four-year (or eight-six month) bond amortization schedule for these bonds. Use formulas and reference cells in Excel. Your TA should be able to follow how you calculate your numbers.

Prepare journal entries to record (1) the sale of the bonds on January 1, 2018, (2) the interest payment for the period ended June 30, 2019 and, (3) the final interest and face value payment at maturity on December 31, 2021.

Show how the balance sheet would report the bond liability and related premium/discount on June 30, 2019.

Answer 1

Answer

Interest is Paid semi-annually, So while calculating Rate, we will divide Rate by 2 so calculate Semi-Annual Interest Rate

AND, while calculating nper, we will multiply by 2 to calculate no. of Semi Annual period

1.

Proceeds from Bonds = $907,723.92 (See picture 1)

2.

We will calculate the PV using Market rate of interest i.e. 8% in our case.

3.

We will calculate the PV using Coupon rate of interest i.e. 8% in our case

4.

. Market interest rate = 8%

Market interest rate for a semiannual period = 8% / 2 = 4%

r = 0.04 (per semiannual period),   

n = 8 (semiannual periods)

Present value of principal

= $800,000 x Present value factor for a single payment (4%, 8 periods)

= $800,000 x 0.73069

= $584,552

Interest payment each semiannual period

= $800,000 x 6%

= $48,000

(Coupon rate for a semiannual period = 12% / 2 = 6 %.)

Present value of interest payments
   = Interest payment each semiannual period
          x Present value factor for an ordinary annuity (4%, 8 periods)

= $48,000 x 6.7327449

= $323,171.76

Price of bonds
= Present value of principal + Present value of interest payments

= $584,552+ $323,171.76

=$907,723.76

The bonds will be sold at $907,723.76

5.

The Bond is sold at premium, because the Market Interest is Lower than Bond Coupon rate that means we are paying more interest than Market.

6.

See Picture 2

7.

1-Jan-18	Cash	907,723.76
	Bonds Payable		800,000.00
	Premium on Bonds		107,723.76
	(Being bonds issued at premium)
30-Jun-19	Interest Expense	35,354.96
	Premium on Bonds	12,645.04
	Cash		48,000.00
	(Being interest recorded and paid)
31-Dec-21	Interest Expense	32,615.38
	Premium on Bonds	15,384.62
	Cash		48,000.00
	(Being interest recorded and paid)
31-Dec-21	Bonds Payable	800,000.00
	Cash		800,000.00
	(Being bonds repaid)

8.

June 30, 2019 Reporting

Bonds Payable (Long term Liabilities) = $800,000

Premium on Bonds Payable (Long term Liabilities) = $71,228.98

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