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Declension Company sold bonds that had a face (maturity) value of $1,000,000 on May 1, 2019...

Declension Company sold bonds that had a face (maturity) value of $1,000,000 on May 1, 2019 for $900,000. The bonds had a 10 year term with a maturity date of April 30, 2029. The annual interest rate on the bonds is 12 percent which is paid semiannually each October 31 and April 30.

What entries should Declension Company make on a. issuance of the bond on May 1, 2019

b. On payment of interest on October 31, 2019

c. On the accrual of interest on the fiscal year end December 31, 2019?

d. On retirement of the bond at 102 on December 31, 2019.

Solutions

Expert Solution

Face Value of Bonds = $1,000,000
Issue Value of Bonds = $900,000

Discount on Bonds = Face Value of Bonds - Issue Value of Bonds
Discount on Bonds = $1,000,000 - $900,000
Discount on Bonds = $100,000

Annual Coupon Rate = 12.00%
Semiannual Coupon Rate = 6.00%
Semiannual Coupon = 6.00% * $1,000,000
Semiannual Coupon = $60,000

Time to Maturity = 10 years
Semiannual Period = 20

Semiannual Amortization of Discount = Discount on Bonds / Semiannual Period
Semiannual Amortization of Discount = $100,000 / 20
Semiannual Amortization of Discount = $5,000

Semiannual Interest Expense = Semiannual Coupon + Semiannual Amortization of Discount
Semiannual Interest Expense = $60,000 + $5,000
Semiannual Interest Expense = $65,000

ekkarill92 answered 2 years ago
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