Question

The following information pertains to a bond issue of the Atomic Corporation:

Maturity value: $1,000,000

Maturity date: January 1, 2023

Stated interest rate: 8%

Interest payments are made annually on December 31st

Date of issue: January 1, 2018

The bond is dated January 1, 2018

Effective (market) interest rate: 10%

Required:

• At what price were the bonds issued?

• Using the effective interest method, prepare an amortization schedule showing annual interest expense, annual discount or premium amortization, and carrying value through December 31, 2020.

• Prepare the necessary journal entries on January 1, 2018 and December 31, 2019.

• How should the bonds be shown on Atomic's December 31, 2018 balance sheet?

Answer 1

Solution 1:

Computation of bond price
Table values are based on:
n=	5
i=	10%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.6209	$1,000,000	$620,921
Interest (Annuity)	3.7908	$80,000	$303,263
Price of bonds			$924,184

solution 2:

Bond Amortization Schedule
Date	Interest paid	Interest expense	Discount amortized	Carrying value
1-Jan-18				$924,184
31-Dec-18	$80,000	$92,418	$12,418	$936,602
31-Dec-19	$80,000	$93,660	$13,660	$950,263
31-Dec-20	$80,000	$95,026	$15,026	$965,289
31-Dec-21	$80,000	$96,529	$16,529	$981,818
31-Dec-22	$80,000	$98,182	$18,182	$1,000,000

Solution 3:

Journal Entries
Date	Particulars	Debit	Credit
1-Jan-18	Cash Dr	$924,184.00
	Discount on issue of bond Dr	$75,816.00
	To Bond Payable		$1,000,000.00
	(To record issue of bond)
31-Dec-19	Interest expense Dr	$93,660.00
	To Cash		$80,000.00
	To Discount on issue of bond		$13,660.00
	(To record interest payment and discount amortization)

Solution 4:

Balance Sheet (Partial) As of December 31, 2018
Particulars		Amount
Long term liabilities:
Bond Payable	$1,000,000
Less: Discount on bond payable	$63,398
Net Bond Liability		$936,602