On July 1, Year1, Wellco issued bonds with a face value of $200,000. The bonds have...

On July 1, Year1, Wellco issued bonds with a face value of $200,000. The bonds have a stated annual interest rate of 4% and the interest is paid semi-annually on June 30 and December 31. (You do not need to know the maturity date of these bonds to do the problem.) Wellco received $160,800 for the bonds when the market rate of interest was 6%. At December 31, Year1, the fair market value of the debt was $164,000. Show your answers at the top of the answer box, clearly labeled. Show your work after that- and label the work as well. Round dollar values to the nearest dollar.

Compute the amount of the semi-annual interest payment paid by Wellco to the bondholders on December 31, Year1.

Compute the interest expense recorded by Wellco on December 31, Year1 as part of the entry to record the first payment of interest.

At what amount will the bond be presented on the balance sheet at 12/31Year1? (Give me a number or show a computation. If multiple accounts are presented together, show me each account and the final balance sheet valuation.)

Compute the interest expense recorded by Wellco on June 30, Year2 as part of the entry to record the second payment of interest. .

Solutions

Expert Solution

Solution:

Part 1 --- Compute the amount of the semi-annual interest payment paid by Wellco to the bondholders on December 31, Year1.

Face Value of the bonds = $200,000

Semi Annual Coupon Rate = 4%*1/2 = 2%

Semi Annual Interest Payment to the bondsholders on Dec 31, Year 1 = Face Value 200,000 x Semi Annual Coupon Rate 2% = $4,000

Part 2 ---- Compute the interest expense recorded by Wellco on December 31, Year1 as part of the entry to record the first payment of interest.

Interest Expense on Dec 31 = Carrying Value of the bonds $160,800 * Semi Annual Market Interest Rate 6%/2

= $4,824

It is assumed that the company is using effective interest rate method to amortize the discount or premium on bonds.

Part 3 - At what amount will the bond be presented on the balance sheet at 12/31Year1? (Give me a number or show a computation. If multiple accounts are presented together, show me each account and the final balance sheet valuation.)

Bonds Payable = $200,000

Less: Discount on Bonds Payable (Unamortized portion) = (200,000 – 160,800) Discount – Amortized Discount $ (4824 – 4000)

= $39,200 – 824

= $38,376

Carrying Value of Bonds Payable = $161,624

Part 4 --- Compute the interest expense recorded by Wellco on June 30, Year2 as part of the entry to record the second payment of interest.

Interest expense on June 30, Year 2 = Carrying Value at the beginning of period $161,624 x Market Interest Rate 6%*1/2 = $4849

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ekkarill92 answered 9 months ago

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