Question

Houston Co. issues $100 million in bonds on January 1, 2017 to expire in 6 years. Interest is paid semi-annually on June 30 and December 31. The coupon (stated) rate and the yield are given below. Dallas Inc. purchased $1 million of the bonds (face value). Dallas Inc. classifies the bonds as available for sale.

Stated Coupon Rate= 4.5% Market Yield Rate= 4%

a.) Calculate the price and prepare the amortization table the $100 million bonds issued by Houston Co.

b.) Prepare the journal entry at issuance for Houston Co.

c.) Prepare the two interest expense entries for 2017 for Houston Co.

d.) Prepare the amortization table for the $1 million bonds purchased by Dallas Inc.

e.) Prepare the journal entry for purchase of the bonds by Dallas Inc. at the issue price.

f.) Prepare the two journal entries for the receipt of interest revenue by Dallas Inc.

g.) Assuming that the market price of the bonds is 101 on December 31, 2017, prepare the necessary journal for Dallas Inc.

Answer 1

Solution:

Part A – Bond Issue Price and Amortization Table

It is given in the question that the market yield rate is 4%. It means the Market Rate of Return on the bonds is 4%. So we need to calculate the Price of the bonds issued by using the market yield 4%.

Calculation of Bond Issue Price

Par Value = $100,000,000

Semi Annual Coupon Interest = Par Value 100,000,000 * Coupon Rate 4.5% * 1/2 Half Yearly = $2,250,000

Semiannual period to maturity (n) = 6 years x 2 = 12

Semi Annual Market Interest Rate (R) = 4%*1/2 = 2%

Present Value of Bonds (Price of the bonds issued) = Semi Annual Coupon Interest x PVIFA (R, n) + Par Value x PVIF (R, n)

= (2,250,000*10.57534) + (100,000,000*0.78849)

= $23,794,515 + 78,849,000

= $102,643,515

Bond Issue Price = $102,643,515

Note -- Calculation of Present Value Factor (Rounded to 5 decimal places)

PVIFA (R, n) = Present Value interest factor for ordinary annuity at R% for n periods = (1 – 1/(1+R)ⁿ) / R

PVIFA (2%, 12) = (1 – 1/(1+0.02)¹²) / 0.02 = 10.57534

PVIF (R, n) = Present Value interest factor for ‘n’ period at ‘R’% = 1/(1+R)ⁿ

PVIF (2%, 20) = 1/(1+0.02)¹²= 0.78849

Amortization Table

Schedule of Amortization of Bond PREMIUM (Effective Rate Method)
Payment intervals	Date	Cash Paid (Face Value of the Bonds $100,000,000 x Coupon Rate 4.5% * 1/2 half yearly)	Interest Expense (Carrying Value at the beginning of period x Market Interest Rate 4% * 1/2 Half Yearly)	Premium Amortized (Cash Paid - Interest Expense)	Premium on Bonds Payable (Unamortized Portion B/S)	Par Value of Bonds Payable	Carrying Value of the bonds at the end of period (Par Value + Balance of Unamortized Bond Premium)
0	Jan.1, 2017				$2,643,515	$100,000,000	$102,643,515
1	June.30, 2017	$2,250,000	$2,052,870	$197,130	$2,446,385	$100,000,000	$102,446,385
2	Dec.31, 2017	$2,250,000	$2,048,928	$201,072	$2,245,313	$100,000,000	$102,245,313
3	June.30, 2018	$2,250,000	$2,044,906	$205,094	$2,040,219	$100,000,000	$102,040,219
4	Dec.31, 2018	$2,250,000	$2,040,804	$209,196	$1,831,024	$100,000,000	$101,831,024
5	June.30, 2019	$2,250,000	$2,036,620	$213,380	$1,617,644	$100,000,000	$101,617,644
6	Dec.31, 2019	$2,250,000	$2,032,353	$217,647	$1,399,997	$100,000,000	$101,399,997
7	June.30, 2020	$2,250,000	$2,028,000	$222,000	$1,177,997	$100,000,000	$101,177,997
8	Dec.31, 2020	$2,250,000	$2,023,560	$226,440	$951,557	$100,000,000	$100,951,557
9	June.30, 2021	$2,250,000	$2,019,031	$230,969	$720,588	$100,000,000	$100,720,588
10	Dec.31, 2021	$2,250,000	$2,014,412	$235,588	$485,000	$100,000,000	$100,485,000
11	June.30, 2022	$2,250,000	$2,009,700	$240,300	$244,700	$100,000,000	$100,244,700
12	Dec.31, 2022	$2,250,000	$2,005,300	$244,700	($0)	$100,000,000	$100,000,000
		$27,000,000	$24,356,485	$2,643,515

Part b -- the journal entry at issuance for Houston Co.

Date	General Journal	Debit	Credit
Jan.1, 2017	Cash (Issue price)	$102,643,515
	Bonds Payable (Face Value)		$100,000,000
	Premium on Bonds Payable (Bal. fig)		$2,643,515

c.) Prepare the two interest expense entries for 2017 for Houston Co.

Date	General Journal	Debit	Credit
June.30, 2017	Interest Expense	$2,052,870
	Premium on Bonds Payable	$197,130
	Interest Payable or Cash		$2,250,000
Dec.31, 2017	Interest Expense	$2,048,928
	Premium on Bonds Payable	$201,072
	Interest Payable or Cash		$2,250,000

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Pls ask separate question for remaining parts.