Question

On January 1, 2018, Ellison Co. issued 9 year bonds with a face value of $250,000,000 and a stated interest rate of 7.5%, payable semiannually on July 1 and January 1. The bonds were sold to yield 8%.

a. The issue price of the bonds is

b. Record the issuance on January 1, 2018.

c. Prepare the journal entries for the interest expense and payments for 2018, 2019, 2020, 2021 and 2022.

Answer 1

• All working forms part of the answer
• Working

	Annual Rate	Applicable rate
Market Rate	8.0%	4.0%
Coupon Rate	7.5%	3.75%

Face Value	$    250,000,000.00
Term (in years)	9
Total no. of interest payments	18

	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$        250,000,000.00	at	4.0%	Interest rate for	18	term payments
PV of $1	0.493628121
PV of	$        250,000,000.00	=	$        250,000,000.00	x	0.493628121	=	$               123,407,030.25	A
Interest payable per term	at	3.75%	on	$ 250,000,000.00
Interest payable per term	$             9,375,000.00
PVAF of 1$	for	4.00%	Interest rate for	18	term payments
PVAF of 1$	12.65929697
PV of Interest payments	=	$         9,375,000.00	x	12.65929697	=		$               118,680,909.14	B
				Bond Value (A+B)			$               242,087,939.39

• Requirement ‘a’

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at market rate of interest, and

Discounted Interest payments amount (during the lifetime) at market rate of interest.

	Amount	PV factor	Present Values
PV of Face Value of	$    250,000,000.00	0.493628121	$ 123,407,030.25
PV of Interest payments of	$         9,375,000.00	12.65929697	$ 118,680,909.14
Issue Price of Bonds = Answer			$ 242,087,939.39

• Requirement ‘b’

Date	Accounts titles	Debit	Credit
I Jan 2018	Cash	$ 242,087,939.39
	Discount on Bonds Payable	$       7,912,060.61
	Bonds payable		$     250,000,000.00
	(Bonds Issued at Discount)

• Requirement ‘c’

--Working

Cash payment	Interest expense	Premium on Bonds payable	Carrying Value of Bond
		$         7,912,060.61	$                  242,087,939
$                  9,375,000	$            9,683,518	$                (308,518)	$                  242,396,457
$                  9,375,000	$           9,695,858	$                (320,858)	$                  242,717,315
$                  9,375,000	$            9,708,693	$                (333,693)	$                  243,051,008
$                  9,375,000	$            9,722,040	$                (347,040)	$                  243,398,048
$                  9,375,000	$            9,735,922	$                (360,922)	$                  243,758,970
$                  9,375,000	$            9,750,359	$                (375,359)	$                  244,134,329
$                  9,375,000	$            9,765,373	$                (390,373)	$                  244,524,702
$                  9,375,000	$            9,780,988	$                (405,988)	$                  244,930,690
$                  9,375,000	$            9,797,228	$                (422,228)	$                  245,352,918
$                  9,375,000	$            9,814,117	$                (439,117)	$                  245,792,034
$                  9,375,000	$            9,831,681	$                (456,681)	$                  246,248,716
$                  9,375,000	$            9,849,949	$                (474,949)	$                  246,723,664
$                  9,375,000	$            9,868,947	$                (493,947)	$                  247,217,611
$                  9,375,000	$            9,888,704	$                (513,704)	$                  247,731,315
$                  9,375,000	$            9,909,253	$                (534,253)	$                  248,265,568
$                  9,375,000	$            9,930,623	$                (555,623)	$                  248,821,191
$                  9,375,000	$            9,952,848	$                (577,848)	$                  249,399,038
$                  9,375,000	$            9,975,962	$                (600,962)	$                  250,000,000

--Answers

Date	Accounts title	Debit	Credit
01-Jul-18	Interest Expense	$9,683,517.58
	Discount on Bonds Payable		$308,517.58
	Cash		$9,375,000.00
	(Interest paid)
31-Dec-18	Interest Expense	$9,695,858.28
	Discount on Bonds Payable		$320,858.28
	Interest Payable		$9,375,000.00
	(Interest accrued)
01-Jan-19	Interest Payable	$9,375,000.00
	Cash		$9,375,000.00
	(Interest paid)
01-Jul-19	Interest Expense	$9,708,692.61
	Discount on Bonds Payable		$333,692.61
	Cash		$9,375,000.00
	(Interest paid)
31-Dec-19	Interest Expense	$9,722,040.31
	Discount on Bonds Payable		$347,040.31
	Interest Payable		$9,375,000.00
	(Interest accrued)
01-Jan-20	Interest Payable	$9,375,000.00
	Cash		$9,375,000.00
	(Interest paid)
01-Jul-20	Interest Expense	$9,735,921.93
	Discount on Bonds Payable		$360,921.93
	Cash		$9,375,000.00
	(Interest paid)
31-Dec-20	Interest Expense	$9,750,358.80
	Discount on Bonds Payable		$375,358.80
	Interest Payable		$9,375,000.00
	(Interest accrued)
01-Jan-21	Interest Payable	$9,375,000.00
	Cash		$9,375,000.00
	(Interest paid)
01-Jul-21	Interest Expense	$9,765,373.16
	Discount on Bonds Payable		$390,373.16
	Cash		$9,375,000.00
	(Interest paid)
31-Dec-21	Interest Expense	$9,780,988.08
	Discount on Bonds Payable		$405,988.08
	Interest Payable		$9,375,000.00
	(Interest accrued)
01-Jan-22	Interest Payable	$9,375,000.00
	Cash		$9,375,000.00
	(Interest paid)
01-Jul-22	Interest Expense	$9,797,227.61
	Discount on Bonds Payable		$422,227.61
	Cash		$9,375,000.00
	(Interest paid)
31-Dec-22	Interest Expense	$9,814,116.71
	Discount on Bonds Payable		$439,116.71
	Interest Payable		$9,375,000.00
	(Interest accrued)