Question

In: Accounting

Amba Ltd issues 2 million $2, 5-year, 6% semi-annual coupon debentures to the public on 1...

Amba Ltd issues 2 million $2, 5-year, 6% semi-annual coupon debentures to the public on 1 January 2019. At that date the market requires a 4% return for similar debentures. Amba Ltd’s balance date is 31 December.

Required:

a). Calculate the issue price for the debenture, showing calculations. b). Prepare a repayment/amortisation schedule for the debentures. c). Provide the journal entries (with narrations) for:

  1. 1 January 2019;

  2. 31 December 2020 (second year); and

  3. 31 December 2023 (end of the Debenture term).

Solutions

Expert Solution

Face Value of Bonds 2,000,000 * $2 = $4,000,000
Effective Life of Bonds (in years) = 5
Maturity amount of Bonds $4,000,000
Coupon rate = 6% per year payable semi annually i.e. 3% per semi annual
Semi annual Coupon Amount = $4,000,000 × 3.00%
= $120,000 This will be paid 10 times
n = 5 years * 2 = 10 semi annuals
a) Computation of issue price for the debenture:-
Market rate on similar Notes (r) = 4 %p.a.
= 2% per semi annual
PVAF(r, n) = Present Value Annuity factor at r% for n periods
Present Value of an Annuity of 1 at 2% for 10 periods = 8.9825850
PVIF(r, n) = Present Value interest factor at r% for n periods
Present Value of 1 at 2% at n= 10 periods = 0.8203483
Price of Bond = Coupon Amount * PVAF(r,n)     + Maturity Amount * PVIF(r,n)
Table values are based on:
n = 10
r = 2%
Cash Flow Table Value Amount Present value
a b c = a*b
Interest (annuity) 8.9825850 $120,000 $1,077,910
Principal (maturity) value 0.8203483 $4,000,000 $3,281,393
Issue Price of debenture $4,359,303
b) Effective Interest Amortization Table :-
Schedule of Interest Expense and Bond Premium Amortization
Effective Interest Method
Date Cash Interest Interest Expense           Premium Amortized Carrying Value (Beginning balance - amortization)
a b = $4,000,000*6%*6/12 c = h of previous row *4%*6/12 d = b-c h = h of previous row - d
1/1/2019 $4,359,303
30/06/2019 $120,000 $87,186 $32,814 $4,326,489
31/12/2019 $120,000 $86,530 $33,470 $4,293,019
30/06/2020 $120,000 $85,860 $34,140 $4,258,880
31/12/2020 $120,000 $85,178 $34,822 $4,224,057
30/06/2021 $120,000 $84,481 $35,519 $4,188,538
31/12/2021 $120,000 $83,771 $36,229 $4,152,309
30/06/2022 $120,000 $83,046 $36,954 $4,115,355
31/12/2022 $120,000 $82,307 $37,693 $4,077,662
30/06/2023 $120,000 $81,553 $38,447 $4,039,216
31/12/2023 $120,000 $80,784 $39,216 $4,000,000
c) Journal entries:-
Date General Journal Debit   Credit
1-Jan-19 Cash    $                             4,359,303
               Bonds Payable $          4,000,000
               Premium on bonds payable   $             359,303
(To record issue of bonds on premium)
31 December 2020 (second year) Interest Expense   $                                  85,178
Premium on bonds payable   $                                  34,822
               Cash   $             120,000
(To record semiannual interest payment and amortization of premium)
31 December 2023 (end of the Debenture term) Interest Expense   $                         &nb

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