Question

On January 1, 2011, Weimin Inc. issued three-year 4.5% bonds with a face value of $100,000. Coupon interests are payable annually on December 31. The effective interest rate is 5%.

Present value interest factor of $1 per period at i% for 3 periods, PVIF(i,n).

Period

1%-.971

2%- .942

3%- .915

4%-.889

5%- .864

6%-.840

7%- .816

8%- .794

9%- .772

10%- .751

Present value interest factor of an (ordinary) annuity of $1 per period at i% for 3 periods, PVIFA(i,n).

Period

1%- 2.941

2%- 2.884

3%-2.829

4%- 2.775

5%- 2.723

6%- 2.673

7%-2.624

8%-2.577

9%- 2.531

10%- 2.487

Required: (Must show calculations. Round to the nearest dollar.)

A.Compute bond issue price.

B. Complete the amortization table from issuance to maturity.

C. Assume there is no issue cost. Use a journal entry to record the bond issue. How much is the book value of liability on issue day?

            Journal Entry:

            Book Value of Liability =

D. What is the book value of liability on Dec 31, 20x1? What is interest expense for the year ended Dec 31, 20x1? (assume effective interest method is used)

            Book value of liability =

            Interest expense =

E.Use a journal entry to record interest expense on Dec 31, 20x1.

F,  In the above problem, assume issue cost of $1,000 was incurred. What is the book value of liability on the day of the issue?

Answer 1

Part A
Table values are based on:
Face Amount	$                                                                        100,000
Interest Payment($100,000*4.5%)	$                                                                            4,500
Market Interest rate per period	5.00%
Cash Flow	Table Value(PV of 5% for 3 period)	Amount	Present Value
PV of Interest	2.723	$                                                            4,500	$12,254
PV of Principal	0.864	$                                                        100,000	$86,400
PV of Bonds Payable(Issue Price)			$98,654
Part B
Amortization Table-As per Effective Interest method
Date	Cash Interest paid	Interest expenses(Bond carrying amount*5%)	Discount amortized	Unamortized Discount	Bond carrying amount
Col I	Col II	Col III	Col IV(Col III - Col II)		Col VI
Jan 1/2011				$                                  1,346	$                            98,654
Dec 31/2011	$                                                                            4,500	$                                                            4,933	$                                               433	$                                     913	$                            99,087
Dec 31/2012	$                                                                            4,500	$                                                            4,954	$                                               454	$                                     459	$                            99,541
Dec 31/2013	$                                                                            4,500	$                                                            4,959	$                                               459	$                                        -	$                          100,000
Part C
Date	Account title and explanation	Debit(in $)	Credit(in $)
Jan 1/2011	Cash	$                                                          98,654
	Disount on Bond payable	$                                                            1,347
	Bonds Payable		$                                        100,000
	(to bond issued at discount)
Book Value of Liability on issue date is $98,654
Part D
Book Value of Liability on Dec 31,20X1 =$99,087
Interest expense for 20X1 =$4,933
Part E
Dec 31/2011	Interest expense	$                                                            4,933
	Cash		$                                            4,500
	Disount on Bond payable		$                                               433
	(to bond discount amortized and interest paid)
Part F
Book Value of Liability on issue date is $99,654($98,654+$1,000)