Question

Innovative Component Inc. needed financing to build a new manufacturing plant. On June 30th, 2014, Innovative Component issued $2,300,000 of 8-year bonds with a 6% coupon rate (payments due on December 31st and June 30^th). The effective interest rate was 8%.

Required:

1. Prepare a bonds amortization table.
2. Use the financial statement effects template below to record the bond issue and Innovative Component’s first two interest payments.

Answer 1

Requirement:1

innovative component inc.
BOND DISCOUNT AMORTIZATION
EFFECTIVE-INTEREST METHOD-SEMIANNUAL INTEREST PAYMENTS
Interest Periods	Cash Paid	Interest Expense	Change in Carrying Value	Carrying Value
6/30/2014				$           2,031,997
12/31/2014	$                 69,000	$                    81,280	$                12,280	$           2,044,277
6/30/2015	$                 69,000	$                    81,771	$                12,771	$           2,057,048
12/31/2015	$                 69,000	$                    82,282	$                13,282	$           2,070,330
6/30/2016	$                 69,000	$                    82,813	$                13,813	$           2,084,143
12/31/2016	$                 69,000	$                    83,366	$                14,366	$           2,098,509
6/30/2017	$                 69,000	$                    83,940	$                14,940	$           2,113,449
12/31/2017	$                 69,000	$                    84,538	$                15,538	$           2,128,987
6/30/2018	$                 69,000	$                    85,159	$                16,159	$           2,145,147
12/31/2018	$                 69,000	$                    85,806	$                16,806	$           2,161,953
6/30/2019	$                 69,000	$                    86,478	$                17,478	$           2,179,431
12/31/2019	$                 69,000	$                    87,177	$                18,177	$           2,197,608
6/30/2020	$                 69,000	$                    87,904	$                18,904	$           2,216,512
12/31/2020	$                 69,000	$                    88,660	$                19,660	$           2,236,173
6/30/2021	$                 69,000	$                    89,447	$                20,447	$           2,256,620
12/31/2021	$                 69,000	$                    90,265	$                21,265	$           2,277,885
6/30/2022	$                 69,000	$                    91,115	$                22,115	$           2,300,000

Working:

Present value of interest payments	$              804,008
[$2300000*6%*6/12*11.6523 PV annuity factor (8%, 8 years, semi annual interest bond)]
Present value of the face value	$          1,227,989
[$ 2300000*0.53391] PV ordinary factor (8%, 8 years)]
Issue Price	$          2,031,997

Requirement:2

No	Date	Account Titles	Debit	Credit
1	6/30/2014	Cash	$          2,031,997
		Discount on Bands Payable	$              268,003
		Bonds Payable		$     2,300,000
		( To record bonds issue)
2	12/31/2014	Interest Expense	$                81,280
		Discount on Bonds Payable		$           12,280
		Cash		$           69,000
		( To record interest expense paid)
3	6/30/2015	Interest Expense	$                81,771
		Discount on Bonds Payable		$           12,771
		Cash		$           69,000
		( To record interest expense paid)