Question

Can you explain what numbers were used to calculate the price of the bond?

On June 1, 20x1, Jeff Co. issued $12,000,000 of 10% bonds to yield 12%. Interest is payable semiannually on May 31 and November 30. The bonds mature in 15 years. Jeff Co. is a calendar-year corporation.

       Required:

Determine the issue price of the bonds. Show computations.

Prepare an amortization table through the first two interest periods using the effective interest method.

Prepare the journal entries on

June 1, 20x1

November 30, 20x1

December 31, 20x1

May 31, 20x2

What would be the journal entry if all bonds are retired at 103 on May 1, 20x2 right after the second payment.

Answer 1

So for the price of bond which yields 12 % , you have to calculate the present value

there are two obligations associated with the bonds, first is the interest payment in this case it is 15 years and repayment in the maturity year i.e. 15 th year , so we calucuate it as follows

Interest = 12000000*10%*6/12=6000000

PV of annuity factor (i=6% , n=30) =.13.76483

pv value=8258898

Note:where the interest payment is done half yearly , two changes take place to calculate Present value the rate is halved and period is doubled

so we have halved the 12% rate to 6% and time to 30 periods instead of 15 periods

in the 15 th year(30 periods) you make repayment

principal amount = 12000000

PV factor (i=6%,t=30)=.17411=2089320

so you have price of the bond=2089320+8258898=10348218

Here is the amortization schedule

Date	Interest Exp	Cash		Amortization	Book Value
6/1/x1					10,348,218
11/30/x1	620,893	600,000		20,893	10,369,111
2	622,147	600,000		22,147	10,391,258
3	623,475	600,000		23,475	10,414,733
4	624,884	600,000		24,884	10,439,617
5	626,377	600,000		26,377	10,465,994
6	627,960	600,000		27,960	10,493,954
7	629,637	600,000		29,637	10,523,591
8	631,415	600,000		31,415	10,555,007
9	633,300	600,000		33,300	10,588,307
10	635,298	600,000		35,298	10,623,605
11	637,416	600,000		37,416	10,661,022
12	639,661	600,000		39,661	10,700,683
13	642,041	600,000		42,041	10,742,724
14	644,563	600,000		44,563	10,787,287
15	647,237	600,000		47,237	10,834,525
16	650,071	600,000		50,071	10,884,596
17	653,076	600,000		53,076	10,937,672
18	656,260	600,000		56,260	10,993,932
19	659,636	600,000		59,636	11,053,568
20	663,214	600,000		63,214	11,116,782
21	667,007	600,000		67,007	11,183,789
22	671,027	600,000		71,027	11,254,817
23	675,289	600,000		75,289	11,330,106
24	679,806	600,000		79,806	11,409,912
25	684,595	600,000		84,595	11,494,507
26	689,670	600,000		89,670	11,584,177
27	695,051	600,000		95,051	11,679,228
28	700,754	600,000		100,754	11,779,981
29	706,799	600,000		106,799	11,886,780
30	713,207	600,000		113,207	11,999,987

and the journal entries

1	Dr. Cash			10,348,218
	Discount on B/P			1,651,782
		Cr. B/P			12,000,000
2	Dr. Interest Expense			620,893
		Cr. Discount on B/P			20,893
		Cash			600,000
3	Dr. Interest Expense			103,691
		Cr. Discount on B/P			3,691
		Interest Payable			100,000
4	Dr. Interest Payable		100,000
	Interest Expense		518,456
		Cr. Cash			600,000
		Discount on B/P			18,456