On January 1, 2018 Ellison Co. issued eight-year bonds with a face value of $100,000,000 payable...

On January 1, 2018 Ellison Co. issued eight-year bonds with a face value of $100,000,000 payable semiannually on June 30 and December 31. The bonds are callable at 101. Coupon rate is 8% Market rate is 6%

a) What is the issue price of the bonds

b) Prepare an amortization table using the effective interest rate method for the eight years of the bonds.

c) Prepare the journal entries for the interest payments on June 30, 2018 and December 31, 2018.

d) Assume that the bonds are called on December 31, 2023 at 101. Prepare the journal entry to record the call.

Solutions

Expert Solution

	ans a
	Issue Price	112561000
	Price of the bond = c × F × (1 − (1 + r)^-t)/r+F(1 + r)^t
	C=Interest Rate	F= Face Value	r=Market Interest Rate
	Price of Bond= Present value of Interest payments+Present value of the bond
	Price of Bond	4000000*(1-(1.03)^-16)/.03)+1000000/(1.03)^16
		(4000000(1-.62317)/.03)+100000000.62317			112561000
	Face vale				$100,000,000
	Premium				$12,561,000
	Interest (100000000*4%)	4000000
	ans b Amortiztaion Table
	A	B	C	D	E	G $
	Date	Interest Payment @4%	Interest expenses at 3%*G	Amortization of Bond C-B	cr, balance in the a/c Bond Premium a/c	Carrying value of Bond F+E
		Credit cash	Debit Interest Expense	Bond Premium
	Jan 1 2018				12561000	112561000
	June 30 2018	4000000	3376830	623170	11937830	111937830
	Dec 31 2018	4000000	3358135	641865	11295965	111295965
	June 30 2019	4000000	3338879	661121	10634844	110634844
	Dec 31 2019	4000000	3319045	680955	9953889	109953889
	June 30 2020	4000000	3298617	701383	9252506	109252506
	Dec 31 2020	4000000	3277575	722425	8530081	108530081
	June 30 2021	4000000	3255902	744098	7785983	107785983
	Dec 31 2021	4000000	3233580	766420	7019563	107019563
	June 30 2022	4000000	3210587	789413	6230150	106230150
	Dec 31 2022	4000000	3186904	813096	5417054	105417054
	June 30 2023	4000000	3162512	837488	4579566	104579566
	Dec 31 2023	4000000	3137387	862613	3716953	103716953
	June 30 2024	4000000	3111509	888491	2828462	102828462
	Dec 31 2024	4000000	3084854	915146	1913315	101913315
	June 30 2025	4000000	3057399	942601	970715	100970715
	Dec 31 2025	4000000	3029121	970879	0	100000000

ans c
Date	Accounts Title	Dr	Cr
30-Jun	Interest expenses	3376830
	Premium on Bonds payable	623170
	Cash		4000000

31-Dec	Interest expenses	3358135
	Premium on Bonds payable	641865
	Cash		4000000

ans d	Bonds Payable	100000000
	Premium on Bonds payable	862613
	Loss on Redemption of Bonds	137387
	Cash (100000000*101%)		101000000

If any doubt please comment

ekkarill92 answered 9 months ago

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