Question
In: Accounting
Pineapples Corporation is in need of cash. It issues bonds with a $2 million face value....
Pineapples Corporation is in need of cash. It issues bonds with a $2 million face value. The bonds have a 8.48% coupon rate. The market rate is 6%. The bonds have a life of 10 years, and are compounded semiannually. Pineapples Corp. issues the bonds on 1/1/20. Please provide all journal entries that Pineapples Corp. must record during 2020 in relation to these bonds.
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Expert Solution
| No. | Date | General Journal | Debit | Credit |
| 1 | 1/1/2020 | Cash | $ 2,368,961 | |
| Premium on Bonds Payable | $ 368,961 | |||
| Bonds Payable | $ 2,000,000 | |||
| (To record bond issued at premium ) | ||||
| 2 | 30/06/2020 | Interest Expense | $ 71,069 | |
| Premium on Bonds Payable | $ 13,731 | |||
| Cash | $ 84,800 | |||
| ( To record interest expense Paid) | ||||
| 3 | 31/12/2020 | Interest Expense | $ 70,657 | |
| Premium on Bonds Payable | $ 14,143 | |||
| Cash | $ 84,800 | |||
| ( To record interest expense Paid) |
Working:
1)
| Present value of interest payments | $ 1,261,610 |
| [$2M*8.48%*6/12*14.87747 PV annuity factor (3%, 10 years, semi-annual bond)] | |
| Present value of the face value | $ 1,107,352 |
| [$2M * 0.55368PV ordinary factor (3%, 10 years)] | |
| Price of Bonds | $ 2,368,961 |
2) Schedule:
| Effective Interest Method | |||||
| Annual Interest Periods | Interest to Be Paid[a] | Interest Expense to Be Recorded [a+b] | Premium Amortization[b] | Unamortized Discount | Bonds Carrying Amount/Net Book Value |
| 1/1/2020 | $ 368,961 | $ 2,368,961 | |||
| 30/06/2020 | $ 84,800 | $ 71,069 | $ 13,731 | $ 355,230 | $ 2,355,230 |
| 31/12/2020 | $ 84,800 | $ 70,657 | $ 14,143 | $ 341,087 | $ 2,341,087 |
| 30/06/2021 | $ 84,800 | $ 70,233 | $ 14,567 | $ 326,520 | $ 2,326,520 |
| 31/12/2021 | $ 84,800 | $ 69,796 | $ 15,004 | $ 311,515 | $ 2,311,515 |
| 30/06/2022 | $ 84,800 | $ 69,345 | $ 15,455 | $ 296,061 | $ 2,296,061 |
| 31/12/2022 | $ 84,800 | $ 68,882 | $ 15,918 | $ 280,143 | $ 2,280,143 |
| 30/06/2023 | $ 84,800 | $ 68,404 | $ 16,396 | $ 263,747 | $ 2,263,747 |
| 31/12/2023 | $ 84,800 | $ 67,912 | $ 16,888 | $ 246,859 | $ 2,246,859 |
| 30/06/2024 | $ 84,800 | $ 67,406 | $ 17,394 | $ 229,465 | $ 2,229,465 |
| 31/12/2024 | $ 84,800 | $ 66,884 | $ 17,916 | $ 211,549 | $ 2,211,549 |
| 30/06/2025 | $ 84,800 | $ 66,346 | $ 18,454 | $ 193,096 | $ 2,193,096 |
| 31/12/2025 | $ 84,800 | $ 65,793 | $ 19,007 | $ 174,088 | $ 2,174,088 |
| 30/06/2026 | $ 84,800 | $ 65,223 | $ 19,577 | $ 154,511 | $ 2,154,511 |
| 31/12/2026 | $ 84,800 | $ 64,635 | $ 20,165 | $ 134,346 | $ 2,134,346 |
| 30/06/2027 | $ 84,800 | $ 64,030 | $ 20,770 | $ 113,577 | $ 2,113,577 |
| 31/12/2027 | $ 84,800 | $ 63,407 | $ 21,393 | $ 92,184 | $ 2,092,184 |
| 30/06/2028 | $ 84,800 | $ 62,766 | $ 22,034 | $ 70,150 | $ 2,070,150 |
| 31/12/2028 | $ 84,800 | $ 62,104 | $ 22,696 | $ 47,454 | $ 2,047,454 |
| 30/06/2029 | $ 84,800 | $ 61,424 | $ 23,376 | $ 24,078 | $ 2,024,078 |
| 31/12/2029 | $ 84,800 | $ 60,722 | $ 24,078 | $ 0 | $ 2,000,000 |
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