On January 31, 2014, Trapp Logistics Inc. issued a five year, 3.5% bonds payable

Question

On January 31, 2014, Trapp Logistics Inc. issued a five year, 3.5% bonds payable with a face value of 6,000,000. The bonds were issued at 96 and pay interest on January 31 and July 31. Trapp logistics, inc. amortizes bond discount by the straight line method. Record a) issuance of the bonds on January 31, b) the semiannual interest payment and amortization of bond discount on July 31, and c) the interest accrual discount amortization on December 31. d) prepare entries for parts A and B AGAIN assuming the bonds were issued at 102 instead of 96.

Explanation / Answer

We need to calculate the yield to maturity of this bond

The face value = 600000 , Present Value = 576000, Interest = 3.5 % /2 = 1.75% payable semi annually

Time period (n) = 5* 2=10 periods

By intrapolation , we get R = 2.2 % for semi annual period , so interest = 2.2*2 =4.4%

The total discount on the bond is 600000-576000 = 24000

This amount has to be amortized over 5 years

The Journal entry is

Bank Account   Dr 576000

Discount on Issue of Bond Account Dr    24000

                           To 3.5% Bonds payable Account 600000

So, value amortized each year = 24000/5 = 4800

The Interest payment on 31 July will be = 600000 * 1.75% = 10500

Interest on 3.5 % Bond Account Dr 10500

               To Bank Account       10500

Amortization would be = 24000/5 = 4800

Profit & loss Account Dr 4800

               To Discount on Issue of 3.5% Bond 4800

The same entries will be passed for December 31

Now, when Bond is issed at 102,it means it is issued at premium

The new interest rate will be 1.53% for each semi annual interest period

So, annual is 1.53*2 = 3.06%

All other calcualtions are kept same.

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