Question

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).

Answer 1

	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 ekkarill92 Next > < Previous Related Solutions M&N company issues $20 million of ten-year, 7 per cent, semi-annual coupon debentures to public which... M&N company issues $20 million of ten-year, 7 per cent, semi-annual coupon debentures to public which pay interest each six months. The market also requires a rate of return of 7 per cent. Assume that the monies come in and the debentures are allocated on the same day 30 June 2020. Required: a) Provide the accounting entries at 30 June 2020, 31 December 2020. Narrations are required. b) Discuss what factors may cause a debenture is issued at discount, premium... On 1 July 2018 Charter Ltd issues through private placement $10 million in 5-year debentures that... On 1 July 2018 Charter Ltd issues through private placement $10 million in 5-year debentures that pay coupon interest on a yearly basis at a coupon rate of 10 percent per annum. 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