In: Accounting
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 January 2019;
31 December 2020 (second year); and
31 December 2023 (end of the Debenture term).
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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