Question

On January 1, 2016, Emily Tax Services issued $200,000, 9%, four-year bonds. Interest is paid semiannually on June 30 and December 31. The bonds were issued when the market rate was 8%. Required:

5.Find the selling price of the Bonds

6.Prepare an amortization schedule that determines interest at the effective interest rate.

7.Prepare an amortization schedule by the straight-line method.

8.Prepare the journal entries to record interest expense on June 30, 2018, by each of the two approaches.

Please provide details formula.

Answer 1

5.)		Amount $	Excel formula
	Present value of Maturity	146,138	=PV(4%,8,0,-200000,0)
	Add: Present value of Interest Payment	60,595	=PV(4%,8,-200000*4.5%,0,0)
	Selling price of Bonds	206,733

6.)	Date	Cash Interest	Interest Expense	Amortization of	Bond	Carrying
		@4.5% of 200,000	@4% of Carrying value	Premium	Premium	Value
		A	B	(A-B )
	January 1,2016				6,733	206,733
	June 30,2016	9,000	8,269	731	6,002	206,002
	December 31,2016	9,000	8,240	760	5,242	205,242
	June 30,2017	9,000	8,210	790	4,452	204,452
	December 31,2017	9,000	8,178	822	3,630	203,630
	June 30,2018	9,000	8,145	855	2,775	202,775
	December 31,2018	9,000	8,111	889	1,886	201,886
	June 30,2019	9,000	8,075	925	962	200,962
	December 31,2019	9,000	8,038	962	0	200,000
7.)	Date	Cash Interest	Amortization of	Interest Expense	Bond	Carrying
		@4.5% of 200,000	Premium (6,733 /8 )	(A-B )	Premium	Value
		A	B
	January 1,2016				6,733	206,733
	June 30,2016	9,000	842	8,158	5,891	205,891
	December 31,2016	9,000	842	8,158	5,050	205,050
	June 30,2017	9,000	842	8,158	4,208	204,208
	December 31,2017	9,000	842	8,158	3,367	203,367
	June 30,2018	9,000	842	8,158	2,525	202,525
	December 31,2018	9,000	842	8,158	1,683	201,683
	June 30,2019	9,000	842	8,158	842	200,842
	December 31,2019	9,000	842	8,158	-	200,000
8.)	Effective Interest rate
	Date	Account Titles	Debit $	Credit $
	June 30,2016	Interest Expense	8,269
		Bond Premium	731
		Cash		9,000
	Straight line method
	Date	Account Titles	Debit $	Credit $
	June 30,2016	Interest Expense	8,158
		Bond Premium	842
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