Question
In: Accounting
The company has three bond issues and uses the effective interest method to amortize discounts/premiums. Information...
The company has three bond issues and uses the effective interest method to amortize discounts/premiums. Information for each is below:
There was a bond issue with a par value of $250,000 on July 1, 2015 when the market rate of interest was 6%. The bonds have a coupon rate of 5% and interest is paid semiannually on January 1 and July 1. The bonds have a ten-year life when issued. This bond issue is convertible into common stock at the rate of 10 shares for every $1,000 of face value (note - common stock has a par value of $10 per share). On January 2, 2019, $50,000 of face value was converted into common stock. The company uses the book value method to record conversions. The market price of the stock was $90 per share when the bonds were converted.
On May 1, 2015, the company had a bond issue with principal of $200,000. The bond issue has a seven-year life. Interest is payable semi-annually on May 1 and November 1. The coupon rate is 7%. The market rate of interest at issue was 6%. On November 2, 2020, the company called the entire bond issue at 115.
On November 1, 2014, the company issued serial bonds
at par. The face value of the issue was $150,000, and the
coupon interest rate is 6%. Interest is paid annually on
November 1st. The principal will be paid with six equal payments of
$30,000 on November 1, 2015 through November 1, 2019.
Required:
Compute the price of the first two bonds (the serial bonds are issued at par).
Prepare amortization tables (effective interest method) for the first two bonds from the issuance date.
Prepare all journal entries needed for each bond from the date of issue through December 31, 2017. The company has a year-end of December 31st.
Prepare the journal entry to record the bond conversion (first bond) on January 2, 2019.
Prepare the journal entry to record the bond call (second bond) on November 2, 2020
Solutions
Expert Solution
| Computation of issue price of the bond: | |||||||||
| Bond 1: | |||||||||
| Year | Cashflow | P. V @ 3% | P.V | ||||||
| 1 to 20 | 6250 | 14.877 | 92981 | ||||||
| (250000*2.5%) | |||||||||
| 20 | 250000 | 0.554 | 138500 | ||||||
| Issue price | 231481 | ||||||||
| Bond 2: | |||||||||
| Year | Cashflow | P. V @ 3% | P.V | ||||||
| 1 to 14 | 7000 | 11.296 | 79072 | ||||||
| (200000*3.5%) | |||||||||
| 14 | 200000 | 0.661 | 132200 | ||||||
| Issue price | 211272 | ||||||||
| Amortization Table-Bond 1 | |||||||||
| Date | Interest Payment |
Inteterest Expense |
Amortization | Balance in bond Discount account |
Balance in bonds Payable |
Book value of the bonds |
|||
| (Par value*Coupon Rate) | Previous Book value * Yield rate |
||||||||
| July 1,2015 | 18519.00 | 250000.00 | 231481.00 | ||||||
| Jan 1,2016 | 6250.00 | 6944.43 | 694.43 | 17824.57 | 250000.00 | 232175.43 | |||
| July 1,2016 | 6250.00 | 6965.26 | 715.26 | 17109.31 | 250000.00 | 232890.69 | |||
| Jan 1,2017 | 6250.00 | 6986.72 | 736.72 | 16372.59 | 250000.00 | 233627.41 | |||
| July 1,2017 | 6250.00 | 7008.82 | 758.82 | 15613.76 | 250000.00 | 234386.24 | |||
| Jan 1,2018 | 6250.00 | 7031.59 | 781.59 | 14832.18 | 250000.00 | 235167.82 | |||
| July 1,2018 | 6250.00 | 7055.03 | 805.03 | 14027.14 | 250000.00 | 235972.86 | |||
| Jan 1,2019 | 6250.00 | 7079.19 | 829.19 | 13197.96 | 250000.00 | 236802.04 | |||
| July 1,2019 | 6250.00 | 7104.06 | 854.06 | 12343.90 | 250000.00 | 237656.10 | |||
| Jan 1,2020 | 6250.00 | 7129.68 | 879.68 | 11464.21 | 250000.00 | 238535.79 | |||
| July 1,2020 | 6250.00 | 7156.07 | 906.07 | 10558.14 | 250000.00 | 239441.86 | |||
| Jan 1,2021 | 6250.00 | 7183.26 | 933.26 | 9624.88 | 250000.00 | 240375.12 | |||
| July 1,2021 | 6250.00 | 7211.25 | 961.25 | 8663.63 | 250000.00 | 241336.37 | |||
| Jan 1,2022 | 6250.00 | 7240.09 | 990.09 | 7673.54 | 250000.00 | 242326.46 | |||
| July 1,2022 | 6250.00 | 7269.79 | 1019.79 | 6653.74 | 250000.00 | 243346.26 | |||
| Jan 1,2023 | 6250.00 | 7300.39 | 1050.39 | 5603.36 | 250000.00 | 244396.64 | |||
| July 1,2023 | 6250.00 | 7331.90 | 1081.90 | 4521.46 | 250000.00 | 245478.54 | |||
| Jan 1,2024 | 6250.00 | 7364.36 | 1114.36 | 3407.10 | 250000.00 | 246592.90 | |||
| July 1,2024 | 6250.00 | 7397.79 | 1147.79 | 2259.31 | 250000.00 | 247740.69 | |||
| Jan 1,2025 | 6250.00 | 7432.22 | 1182.22 | 1077.09 | 250000.00 | 248922.91 | |||
| July 1,2025 | 6250.00 | 7327.09 | 1077.09 | 0.00 | 250000.00 | 250000.00 | |||
| Amortization Table-Bond 2 | |||||||||
| Date | Interest Payment |
Inteterest Expense |
Amortization | Balance in bond Premium account |
Balance in bonds Payable |
Book value of the bonds |
|||
| (Par value*Coupon Rate) | Previous Book value * Yield rate |
||||||||
| May 1,2015 | 11272.00 | 200000.00 | 211272.00 | ||||||
| Nov 1,2015 | 7000.00 | 6338.16 | 661.84 | 10610.16 | 200000.00 | 210610.16 | |||
| May 1,2016 | 7000.00 | 6318.30 | 681.70 | 9928.46 | 200000.00 | 209928.46 | |||
| Nov 1,2016 | 7000.00 | 6297.85 | 702.15 | 9226.32 | 200000.00 | 209226.32 | |||
| May 1,2017 | 7000.00 | 6276.79 | 723.21 | 8503.11 | 200000.00 | 208503.11 | |||
| Nov 1,2017 | 7000.00 | 6255.09 | 744.91 | 7758.20 | 200000.00 | 207758.20 | |||
| May 1,2018 | 7000.00 | 6232.75 | 767.25 | 6990.95 | 200000.00 | 206990.95 | |||
| Nov 1,2018 | 7000.00 | 6209.73 | 790.27 | 6200.68 | 200000.00 | 206200.68 | |||
| May 1,2019 | 7000.00 | 6186.02 | 813.98 | 5386.70 | 200000.00 | 205386.70 | |||
| Nov 1,2019 | 7000.00 | 6161.60 | 838.40 | 4548.30 | 200000.00 | 204548.30 | |||
| May 1,2020 | 7000.00 | 6136.45 | 863.55 | 3684.75 | 200000.00 | 203684.75 | |||
| Nov 1,2020 | 7000.00 | 6110.54 | 889.46 | 2795.29 | 200000.00 | 202795.29 | |||
| May 1,2021 | 7000.00 | 6083.86 | 916.14 | 1879.15 | 200000.00 | 201879.15 | |||
| Nov 1,2021 | 7000.00 | 6056.37 | 943.63 | 935.52 | 200000.00 | 200935.52 | |||
| May 1,2022 | 7000.00 | 6064.48 | 935.52 | 0.00 | 200000.00 | 200000.00 | |||
| Bond 1: | |||||||||
| Date | Account Explanation | Debit | Credit | ||||||
| 2015 | |||||||||
| July 1. | Cash | 231481 | |||||||
| Bond discount | 18519 | ||||||||
| Bond payable | 250000 | ||||||||
| (Issue of bonds at discount) | |||||||||
| Dec 31. | Interest expense | 6944 | |||||||
| Interest payable | 6944 | ||||||||
| (Bond interest accrued) | |||||||||
| 2016 | |||||||||
| Jan 1. | Interest payable | 6944 | |||||||
| Bond discount | 694 | ||||||||
| Cash | 6250 | ||||||||
| (Interest on bond paid) | |||||||||
| July 1. | Interest expense | 6965 | |||||||
| Bond discount | 715 | ||||||||
| Cash | 6250 | ||||||||
| (Interest on bond paid) | |||||||||
| Dec 31. | Interest expense | 6987 | |||||||
| Interest payable | 6987 | ||||||||
| (Bond interest accrued) | |||||||||
| 2017 | |||||||||
| Jan 1. | Interest payable | 6987 | |||||||
| Bond discount | 737 | ||||||||
| Cash | 6250 | ||||||||
| (Interest on bond paid) | |||||||||
| July 1. | Interest expense | 7009 | |||||||
| Bond discount | 759 | ||||||||
| Cash | 6250 | ||||||||
| (Interest on bond paid) | |||||||||
| Dec 31. | Interest expense | 7032 | |||||||
| Interest payable | 7032 | ||||||||
| (Bond interest accrued) | |||||||||
| Bond 2: | |||||||||
| Date | Account Explanation | Debit | Credit | ||||||
| 2015 | |||||||||
| May 1. | Cash | 211272 | |||||||
| Bond premium | 11272 | ||||||||
| Bond payable | 200000 | ||||||||
| (Issue of bonds at premium) | |||||||||
| Nov 1. | Interest expense | 6338 | |||||||
| Bond premium | 662 | ||||||||
| Cash | 7000 | ||||||||
| (Interest on bond paid) | |||||||||
| Dec 31. | Interest expense | (210610*3%*2/6) | 2106 | ||||||
| Interest payable | 2106 | ||||||||
| (Bond interest accrued) | |||||||||
| 2016 | |||||||||
| May 1. | Interest expense | (210610*3%*4/6) | 4212 | ||||||
| Interest payable | 2106 | ||||||||
| Bond premium | 682 | ||||||||
| Cash | 7000 | ||||||||
| (Interest on bond paid) | |||||||||
| Nov 1. | Interest expense | 6298 | |||||||
| Bond premium | 702 | ||||||||
| Cash | 7000 | ||||||||
| (Interest on bond paid) | |||||||||
| Dec 31. | Interest expense | (209226*3%*2/6) | 2092 | ||||||
| Interest payable | 2092 | ||||||||
| (Bond interest accrued) | |||||||||
| 2017 | |||||||||
| May 1. | Interest expense | (209226*3%*4/6) | 4185 | ||||||
| Interest payable | 2092 | ||||||||
| Bond premium | 723 | ||||||||
| Cash | 7000 | ||||||||
| (Interest on bond paid) | |||||||||
| Nov 1. | Interest expense | 6255 | |||||||
| Bond premium | 745 | ||||||||
| Cash | 7000 | ||||||||
| (Interest on bond paid) | |||||||||
| Dec 31. | Interest expense | (207758*3%*2/6) | 2078 | ||||||
| Interest payable | 2078 | ||||||||
| (Bond interest accrued) | |||||||||
| Bond 3: | |||||||||
| Date | Account Explanation | Debit | Credit | ||||||
| 2014 | |||||||||
| Nov 1. | Cash | 150000 | |||||||
| Bond payable | 150000 | ||||||||
| (Issue of bonds at par) | |||||||||
| Dec 31. | Interest expense | (150000*6%*2/12) | 1500 | ||||||
| Interest payable | 1500 | ||||||||
| (Bond interest accrued) | |||||||||
| 2015 | |||||||||
| Nov 1. | Interest expense | (150000*6%*10/12) | 7500 | ||||||
| Interest payable | 1500 | ||||||||
| Cash | 9000 | ||||||||
| (Interest on bond paid) | |||||||||
| Bond payable | 30000 | ||||||||
| Cash | 30000 | ||||||||
| (Principal of bond repaid) | |||||||||
| Dec 31. | Interest expense | (120000*6%*2/12) | 1200 | ||||||
| Interest payable | 1200 | ||||||||
| (Bond interest accrued) | |||||||||
| 2016 | |||||||||
| Nov 1. | Interest expense | (120000*6%*10/12) | 6000 | ||||||
| Interest payable | 1200 | ||||||||
| Cash | 7200 | ||||||||
| (Interest on bond paid) | |||||||||
| Bond payable | 30000 | ||||||||
| Cash | 30000 | ||||||||
| (Principal of bond repaid) | |||||||||
| Dec 31. | Interest expense | (90000*6%*2/12) | 900 | ||||||
| Interest payable | 900 | ||||||||
| (Bond interest accrued) | |||||||||
| 2017 | |||||||||
| Nov 1. | Interest expense | (90000*6%*10/12) | 4500 | ||||||
| Interest payable | 900 | ||||||||
| Cash | 5400 | ||||||||
| (Interest on bond paid) | |||||||||
| Bond payable | 30000 | ||||||||
| Cash | 30000 | ||||||||
| (Principal of bond repaid) | |||||||||
| Dec 31. | Interest expense | (60000*6%*2/12) | 600 | ||||||
| Interest payable | 600 | ||||||||
| (Bond interest accrued) | |||||||||
| Bond conversion of Bond 1: | |||||||||
| Date | Account Explanation | Debit | Credit | ||||||
| 2019 | |||||||||
| Jan 2. | Bond payable | 50000 | |||||||
| Bond discount (13198*20%) | 2640 | ||||||||
| Common stock (50000/1000)*10*10 | 5000 | ||||||||
| Additional paid in capital | 42360 | ||||||||
| Bond call of Bond 2: | |||||||||
| Date | Account Explanation | Debit | Credit | ||||||
| 2020 | |||||||||
| Nov 2. | Bond payable | 200000 | |||||||
| Loss on retirement of bonds | 27205 | ||||||||
| Bond premium | 2795 | ||||||||
| Cash | (200000*1.15) | 230000 | |||||||
| (bonds called) | |||||||||
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