Question

1. James Inc. issued $20 million of 8 year 10% callable bonds dated July 1, 2018. The bonds were issued at 95. The bonds are callable at 10 James uses straight-line amortization. Record the following transactions.
   1. Record the issuance on July 1.
   2. Record the first payment of interest on December 31.
   3. Record the second payment of interest on June 30.
   4. Was the effective interest rate greater than, less than, or equal to 10%?
   5. Record the bonds called on July 1, 2019.

Answer 1

Annual interest payment = 20,000,000*10%* 6/12 = 1,000,000

Semiannual months = 8 years *2 = 16     [2 semiannual months in a year comprising of 6 months each]

Annual amortization of bond discount =Discount on bond payable /number of years

                                          = 1,000,000/ 16

                                           = 62500

No.	DATE	ACCOUNT TITLE	DEBIT	CREDIT
a	1Juy 2018	cash (20,000,000*95/100)	19,000,000
		Discount on bond payable	1,000,000
		Bond payable		20,000,000
b	December 31	Interest expense	1062500
		Discount on bond payable		62500
		cash		1000000
c	June 30	Interest expense	1062500
		Discount on bond payable		62500
		Cash		1000000

d)

Since the bond is trading at discount (less than par value),Effective interest rate will be greater than 10% coupon rate .

Since Discounting coupons at higher rate will result in lower issue price.

e)Need to know the call price as It is mentioned only as 10. (Is it 10 or some other value)