Question

(TCO D) On January 1, 2010, Ellison Co. issued 8-year bonds with a face value of $1,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 12%. Table values are:

Present value of 1 for 10 periods at 10%		.386
Present value of 1 for 10 periods at 12%		.322
Present value of 1 for 20 periods at 5%	.377
Present value of 1 for 20 periods at 6%	.312
Present value of annuity for 10 periods at 10%	6.145
Present value of annuity for 10 periods at 12%	5.650
Present value of annuity for 20 periods at 5%	12.462
Present value of annuity for 20 periods at 6%	11.470

Instructions:

Calculate the issue price of the bonds.

Without prejudice to your solution in Part (a), assume that the issue price was $884,000. Prepare the amortization table for 2011, assuming that amortization is recorded on interest payment dates.

Answer 1

Rreq 1:
ISSUE PRICE OF BONDS:
Present values of Semi Annual interest for 16 periods at 12% (6% semiannual)								303177
		($30,000 * Annuity factor for 16 periods i.e. 10.1059)
Present value of nominal value realised at end of 8 year								393600
		($1000,000* PVF at Year-8 i.e. 0.3936)
		ISSUE PRICE OF BONDS						696777
Req 2
Date	Interest	Discount		Interest	Unamortized		Carrying Value
	paid	Amortized		Expense	Discount		Of bonds
June30 2010	30000	7250		37250	108750		891250
Dec31 2010	30000	7250		37250	101500		898500
June 30 2011	30000	7250		37250	94250		905750
Dec 31 2011	30000	7250		37250	87000		913000
Note: Cash interest paid: 1000,000 *6%*6/12 = $ 30,000
Note: Straight line method of amortization of dsicount has been followed, as the issue pricec is not according the Present value.
Total Discount: 1000,000 -884,000 =116,000
Number of period: 16
Discount amortized in each period: 116,000/16 = 7250
Interest expense = cash interest +Discount amortized