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6/30/y1, $5,000,000 face value bonds, with an 8% coupon rate, are issued to yield 5%. These...

6/30/y1, $5,000,000 face value bonds, with an 8% coupon rate, are issued to yield 5%. These are 20- year bonds, and they pay interest on June 30 and December 31. These bonds were issued for $6,882,706. Please record the following, using the effective interest approach: 6/30/y1 issuance of the bonds. 12/31/y1 payment of interest. 6/30/y2 payment of interest. 12/31/y2 payment of interest.

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Expert Solution

Answer:

Bond face value = $5,000,000

Bond issued at = $6,882,706

Premium = 6882706 - 5000000 = $1,882,706

Semiannual payment of interest = $5,000,000 * 8%/2 = $200,000

Interest expense for six months ended 12/31/y1 = $6,882,706.* 5%/ 2= $172,068

Amortization of premium = 200000 - 172068 =$27,932

Bond's carrying value as on 12/31/y1 = $6,882,706 - $27,932 = $6,854,774

Similarly, bond's amortization schedule upto 12/31/y2 is calculated as below:

Journal entries recording the transactions are as follows:

--------------------------------------------------------------------------------------------------------------------------------------------------------------

Amortization of premium bases on straight line method:

Bond face value = $5,000,000

Bond issued at = $6,882,706

Premium = 6882706 - 5000000 = $1,882,706

Number of semiannual periods = 20 years * 2 = 40

Amortization of premium (Straight line method) = $1,882,706 / 40 = $47,068

Semiannual payment of interest = $5,000,000 * 8%/2 = $200,000

Interest expense for six months ended 12/31/y1 = $200,000 - $47,068 = $152,932

Bond's carrying value as on 12/31/y1 = $6,882,706 - $47,068 = $6,835,638

Similarly, bond's amortization schedule upto 12/31/y2 is calculated as below:

Journal entries recording the transactions are as follows:

ekkarill92 answered 1 year ago
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