ACC Company issued a 10-year, 8%, $1,000,000 bond on Jan 1, 2009. The bond pays interest...

ACC Company issued a 10-year, 8%, $1,000,000 bond on Jan 1, 2009. The bond pays interest every December 31, with the principal to be paid at the end of 10 years. The market interest rate (effective interest rate) on Jan 1, 2009 was 5%. The market interest rate on December 31,2012 was 4%. (1) Compute the Book value of bonds liability on January 1, 2012. (2) Record the journal entry about interest expense on December 31, 2012.

Expert Solution

Answer :

Calculation of Present value of Bond liability :

= $1,000,000 x PVAF(5%, 10 years)

= $1,000,000 x 7.722

= $617,760

1. Calculation of Book value of bonds liability on January 1, 2012.

Year	Beginning Book value (a)	Interest exp. @5% (b)	Interest Payment @8%(c)	Ending Book value (d)
2009	617,760	30,888	80,000	568,648
2010	568,648	28,432.4	80,000	517,080.4
2011	517,080.4	25,854.02	80,000	462,934.42
2012	462,934.42	23,146.72	80,000	406,081.14

d = a + b - c

Book value of bonds liability on January 1, 2012 is $462,934.42.

2. Journal entry about interest expense on December 31, 2012.

a. Bond interest expense Dr $23,146.72

Bonds payable $23,146.72

b. Bonds payable Dr $80,000

Cash $80,000

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