Question

In: Accounting

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.

Solutions

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 9 months ago
Next > < Previous

Related Solutions

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.
On June 30, 2017, Mitty Inc. issues $5,000,000 face value bonds with a coupon rate of...
On June 30, 2017, Mitty Inc. issues $5,000,000 face value bonds with a coupon rate of 5% issued to yield 7%. The bonds pay interest semi-annually on June 30 and December 31 and mature 20 years from the date of issuance. Mitty Inc uses the effect-interest rate method for recording bond amortization. Please show all work. Required: Prepare the journal entry for the bonds at the date of issuance.   Required: Prepare the journal entry at June 30, 2018.
Johnston, Inc. sold 10-year bonds with a 6% coupon rate to yield 5%. The face value...
Johnston, Inc. sold 10-year bonds with a 6% coupon rate to yield 5%. The face value is $400,000. The bonds pay interest semi-annually. What is the amount of cash proceeds? The cash proceeds are? Please show work on excel and show calculated formulas and use answer by using PV and/or FV table factors
A bond has a face value of $1,000, a coupon rate of 8%, and a yield...
A bond has a face value of $1,000, a coupon rate of 8%, and a yield to maturity of 9.5%. If the bond matures in 8 years, what is the price of the bond? (Assume coupons are paid annually.)
8/31/y1, $3,000,000 face value bonds are issued for $2,600,000 plus accrued interest. These bonds pay interest...
8/31/y1, $3,000,000 face value bonds are issued for $2,600,000 plus accrued interest. These bonds pay interest on October 31 and April 30. These bonds have a coupon rate of 6%, and are dated April 30, y1. The bonds are 20-year bonds, and as such mature on April 30, Y21. Please record the following, using the straight-line approach. This company has a December 31 year end. 8/31/y1, issuance of the bonds (include accrued interest). 10/31/y1, interest payment. 12/31/y1, accrual of interest....
8/31/y1, $3,000,000 face value bonds are issued for $2,600,000 plus accrued interest. These bonds pay interest...
8/31/y1, $3,000,000 face value bonds are issued for $2,600,000 plus accrued interest. These bonds pay interest on October 31 and April 30. These bonds have a coupon rate of 6%, and are dated April 30, y1. The bonds are 20-year bonds, and as such mature on April 30, Y21. Please record the following, using the straight-line approach. This company has a December 31 year end. 8/31/y1, issuance of the bonds (include accrued interest). 10/31/y1, interest payment. 12/31/y1, accrual of interest....
Baby doll Inc., issued bonds at face value at a yield to maturity of 8 percent....
Baby doll Inc., issued bonds at face value at a yield to maturity of 8 percent. Now, with 8 years left until the maturity of the bonds, the company has run into hard times and the yield to maturity on the bonds has increased to 14 percent. What has happened to the price of the bond? b. Suppose that investors believe that Baby doll can make good on the promised coupon payments, but that the company will go bankrupt when...
Williams Co. recently issued bonds with a face value of 10,000,000 and a coupon rate of...
Williams Co. recently issued bonds with a face value of 10,000,000 and a coupon rate of 3% for 8 years. The current market rate of interest is 4% and the bonds pay interest semiannually. 1) Please compute the issuing price of the bond, using a financial calculator or Excel. [Note: you don't have to show me the Present Value (PV) of the principle or PV of the interest payment. All I am asking for is a number for the PV...
On January 1, 2010 Ryan Corporation issued bonds with a face value of $5,000,000 and a...
On January 1, 2010 Ryan Corporation issued bonds with a face value of $5,000,000 and a coupon rate of 5% for $4,670,865. The effective rate on the bonds is 6%. The bonds pay interest each January 1 and July 1 and mature on July 1, 2018. The company uses effective rate amortization method. 6. The journal entry (and amount) to recognize the interest expense on December 31, 2010 would be: a. Debit Interest Expense [$140,126]; Credit Bonds Payable [$15,126]; Credit...
The fixed rate loans are 10 year, 8% (annual) coupon bonds with a yield of 6%.
ASSETS                                                                   LIABILTIES Cash                                   10                                Core Deposits               60 Fed funds                           30                                Fed funds                     50 Loans (floating)                   80                                Euro CDs                       30 Loans (fixed)                       40                                Equity                           30 TOTAL                                170                                                                  170 The fixed rate loans are 10 year, 8% (annual) coupon bonds with a yield of 6%. Cash and fed funds have a 0 duration. Floating loans have a duration of 1.0. All liabilities have a duration of 0.50. 2. What is the duration of the assets? 3. What is the duration of the...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT