Tingham village issued 500 five year bonds on July 1, 2006. The interest payment

Question

Tingham village issued 500 five year bonds on July 1, 2006. The interest payments are due semi-anually (January 1 and July 1) at an annual rate of 6 percent. The effective interest rate on the bonds is 8 percent. The face value of each bond is $1,000. 1) Prepare the journal entry that would be recorded on July 1, 2006 when the bonds were issued. 2) Prepare the journal entry that would be recorded on December 31, 2006. 3) Compute the balance sheet value of the bond liability as of December 31, 2006. Show calculations when necessary

Explanation / Answer

Net Present Value of Interest Cash Flows and Principal Amounts Discounted @ 8% Market Yield 15000 0.961538462 14423.08 15000 0.924556213 13868.34 15000 0.888996359 13334.95 15000 0.854804191 12822.06 15000 0.821927107 12328.91 15000 0.790314526 11854.72 15000 0.759917813 11398.77 15000 0.730690205 10960.35 15000 0.702586736 10538.8 15000 0.675564169 10133.46 500000 0.675564169 337782.1 TOTAL NPV 459445.5 Market Value of the Bond is $459445.5 1. Journal Entry on 1st July,06 for Issuance of the Bond 01-Jul Cash 459445 Discount on Bonds Payable 40555 To Bonds Payable 500000 (500 Bonds Issued @ 1000/Bond) 2. Journal Entry on 31st December,2006 31-Dec Interest on Bonds 15000 To Cash 15000 31-Dec Amortization Expense 4055.5 To Discount on Bonds 4055.5 Working for Amortization Expense Annual Amortization= Discount on Issuance of Bond/No. Of Years of the Bond 40555/5=8111 Amortization Expense at 31/12=8111/2=4055 3 Bond Liability at 31/12/06 Book Value of Bond 500000 Less: Unamortised Discount -40555 Book Value of Bond 459445

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