Question

On January 1, 2018, Swan Company issued bonds with the following characteristics:
Face Value (per bond)	$                1,000
Number of bonds issued	2,000
Coupon (stated) rate	7%
Maturity date	5
Interest payments	Annually
Prevailing rate of interest in the market on January 1, 2018 = 8% 1) Determine the total value of the bonds on January 1, 2018 2) Provide an amortization schedule with the following columns (5 points): Date Interest Payment Interest Expense Amortization Carrying Value 1/1/2018 12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022 3) Provide the January 1, 2018 journal entry

Answer 1

• All working forms part of the answer
• Requirement 1

Total Value of Bonds = No. of bonds x Face value per bond = 2000 x $ 1,000 = $ 2,000,000

Carrying Value / Issue Price is calculated below:

	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$             2,000,000.00	at	8.0%	Interest rate for	5	term payments
PV of $1	0.680583197
PV of	$             2,000,000.00	=	$            2,000,000.00	x	0.680583197	=	$    1,361,166.39
Interest payable per term	at	7.0%	on	$      2,000,000.00
Interest payable per term	$                140,000.00
PVAF of 1$	for	8.0%	Interest rate for	5	term payments
PVAF of 1$	3.992710037
PV of Interest payments	=	$             140,000.00	x	3.992710037	=		$       558,979.41
				Bond Value (A+B)			$    1,920,145.80

• Requirement 2

Period	Interest Payment	Interest Expense	Amortization	Carrying Value
	[A = 2000000 x 7%]	[B = D x 8%]	[C = B – A]	[D = D + C]
1/1/2018				$                      1,920,146
12/31/2018	$                      140,000	$                153,612	$                     13,612	$                      1,933,757
12/31/2019	$                      140,000	$                154,701	$                     14,701	$                      1,948,458
12/31/2020	$                      140,000	$                155,877	$                     15,877	$                      1,964,335
12/31/2021	$                      140,000	$                157,147	$                     17,147	$                      1,981,481
12/31/2022	$                      140,000	$                158,519	$                     18,519	$                      2,000,000

• Requirement 3

Date	Accounts titles	Debit	Credit
1 Jan 2018	Cash	$             1,920,146
	Discount on Bonds Payable	$                   79,854
	Bonds payable		$                2,000,000