Question

On January 1, 2020, the Maxell Company purchased P400,00 of 6% term bonds. The bonds are dated January 1, 2020, and the interest is payable semiannually on June 30 and December 31. At the time the bonds were purchased the market interest rate was 8%. The bonds mature on December 31, 2030. Maxell Company uses the effective interest method of amortization.

Instruction: Determine the following:

1. issue price of the bonds on January 1, 2020
2. total amount of interest revenue for 2020
3. book value of the investment in bonds on December 31, 2020

Answer 1

Issue price of the bonds = 342195.54

Total amount of interest revenue = 12000 + 12000 = 24000

Book value of the investment in bonds on December 31 ,2020 = 345639

Workings:

In excel or financial calculator to calculate issue price of bonds

NPER	22.00	[11 years*2]
FV	400000
PMT	12000.00
Rate	4.00%
PV	342195.54	[-pv(rate,nper,pmt,fv,0)

Amortization schedule:

Date	Cash received	Interest revenue [Carrying amount*11%]	Increase in carrying amount [Interest revenue - cash received]	Carrying amount of note
1/1/20				342195.54
30/6/20	12000	13688	1688	343883
12/31/20	12000	13755	1755	345639
30/6/21	12000	13826	1826	347464
12/31/21	12000	13899	1899	349363
30/6/22	12000	13975	1975	351337
12/31/22	12000	14053	2053	353391
30/6/23	12000	14136	2136	355526
12/31/23	12000	14221	2221	357748
30/6/24	12000	14310	2310	360057
12/31/24	12000	14402	2402	362460
30/6/25	12000	14498	2498	364958
12/31/25	12000	14598	2598	367556
30/6/26	12000	14702	2702	370259
12/31/26	12000	14810	2810	373069
30/6/27	12000	14923	2923	375992
12/31/27	12000	15040	3040	379031
30/6/28	12000	15161	3161	382193
12/31/28	12000	15288	3288	385480
30/6/29	12000	15419	3419	388900
12/31/29	12000	15556	3556	392456
30/6/30	12000	15698	3698	396154
12/31/30	12000	15846	3846	400000