On January 1, 2014, Cron Corporation issued $870,000 in bonds that mature in ten
ID: 2446225 • Letter: O
Question
On January 1, 2014, Cron Corporation issued $870,000 in bonds that mature in ten years. The bonds have a stated interest rate of 8 percent and pay interest on June 30 and December 31 each year. When the bonds were sold, the market rate of interest was 6 percent. The company uses the effective-interest amortization method.
1. What was the issue price on January 1, 2014
2. What amount of interest expense should be recorded on (a) June 30, 2014? and (b) December 31, 2014?
3. What amount of cash interest should be paid (a) June 30, 2014? and (b) December 31, 2014
4. What is the book value of the bonds on (a) June 30, 2014? and (b) December 31, 2014?
4. What is the book value of the bonds on (a) June 30, 2014? and (b) December 31, 2014?
Explanation / Answer
1. Issue price on January 1, 2014
The market rate on the date of issue of bonds is less than the stated rate of bonds. It means that the bonds shall be issued at premium because bonds are providing more return than the other investments.
Issue price of bonds = Present value of Interest payments payable semi-annually for 10 years+ Present value of face value of bonds payable after 10 years
Semi-annual interest payments = $870,000 * 0.08 *1/2 = $34,800
Present value of interest payments = $34,800 (1-1/1.0320)/0.03 =$34,800(1-0.5537)/0.03 = $517,708
Present value of face amount of bonds = $870,000/1.0320 = $870,000 / 1.8061 = $481,700.90
Issue price of bonds = Present value of interest payments + Present value of face amount of bonds
= $517,708 +$481,700.90 = $999,408.90
2. The bonds of face value $870,000 shall be issued at $999,408.90 at premium. This premium of $128,408.90 shall be amortised over the life of bond on the basis of the interest calculated at the effective rate.
The amortization schedule can be drawn as below:
Bond Premium Amortization Schedule
Number of payments
Date of Payment
Interest payment @ 8% per annum'
Bond Interest Expense
Premium Amortization
Unamortized premium
Carrying Value of Bond
0
01-01-2004
(129,408.90)
999,408.90
1
01-07-2004
34,800.00
29,982.27
4,817.73
(124,591.17)
994,591.17
2
01-01-2005
34,800.00
29,837.74
4,962.26
(119,628.90)
989,628.90
3
01-07-2005
34,800.00
29,688.87
5,111.13
(114,517.77)
984,517.77
4
01-01-2006
34,800.00
29,535.53
5,264.47
(109,253.30)
979,253.30
5
01-07-2006
34,800.00
29,377.60
5,422.40
(103,830.90)
973,830.90
6
01-01-2007
34,800.00
29,214.93
5,585.07
(98,245.83)
968,245.83
7
01-07-2007
34,800.00
29,047.37
5,752.63
(92,493.20)
962,493.20
8
01-01-2008
34,800.00
28,874.80
5,925.20
(86,568.00)
956,568.00
9
01-07-2008
34,800.00
28,697.04
6,102.96
(80,465.04)
950,465.04
10
01-01-2009
34,800.00
28,513.95
6,286.05
(74,178.99)
944,178.99
11
01-07-2009
34,800.00
28,325.37
6,474.63
(67,704.36)
937,704.36
12
01-01-2010
34,800.00
28,131.13
6,668.87
(61,035.49)
931,035.49
13
01-07-2010
34,800.00
27,931.06
6,868.94
(54,166.56)
924,166.56
14
01-01-2011
34,800.00
27,725.00
7,075.00
(47,091.55)
917,091.55
15
01-07-2011
34,800.00
27,512.75
7,287.25
(39,804.30)
909,804.30
16
01-01-2012
34,800.00
27,294.13
7,505.87
(32,298.43)
902,298.43
17
01-07-2012
34,800.00
27,068.95
7,731.05
(24,567.38)
894,567.38
18
01-01-2013
34,800.00
26,837.02
7,962.98
(16,604.40)
886,604.40
19
01-07-2013
34,800.00
26,598.13
8,201.87
(8,402.53)
878,402.53
20
01-01-2014
34,800.00
26,352.08
8,402.53
(0.00)
870,000.00
Totals
696,000.00
566,545.71
129,408.90
Above table clearly shows the interest expense, interest paid and carrying amount of bonds on every payment date.
Interest expense to be recorded on:
a) June 30, 2014 = $29,982.27
b) December 31, 2014 = $29,837.74
3. Cash interest paid on:
a) June 30, 2014 = $34,800
b) December 31, 2014 = $34,800
4. Book value of bonds on:
a) June 30, 2014 = $994,591.70
b) December 31, 2014 = 989,628.90
Bond Premium Amortization Schedule
Number of payments
Date of Payment
Interest payment @ 8% per annum'
Bond Interest Expense
Premium Amortization
Unamortized premium
Carrying Value of Bond
0
01-01-2004
(129,408.90)
999,408.90
1
01-07-2004
34,800.00
29,982.27
4,817.73
(124,591.17)
994,591.17
2
01-01-2005
34,800.00
29,837.74
4,962.26
(119,628.90)
989,628.90
3
01-07-2005
34,800.00
29,688.87
5,111.13
(114,517.77)
984,517.77
4
01-01-2006
34,800.00
29,535.53
5,264.47
(109,253.30)
979,253.30
5
01-07-2006
34,800.00
29,377.60
5,422.40
(103,830.90)
973,830.90
6
01-01-2007
34,800.00
29,214.93
5,585.07
(98,245.83)
968,245.83
7
01-07-2007
34,800.00
29,047.37
5,752.63
(92,493.20)
962,493.20
8
01-01-2008
34,800.00
28,874.80
5,925.20
(86,568.00)
956,568.00
9
01-07-2008
34,800.00
28,697.04
6,102.96
(80,465.04)
950,465.04
10
01-01-2009
34,800.00
28,513.95
6,286.05
(74,178.99)
944,178.99
11
01-07-2009
34,800.00
28,325.37
6,474.63
(67,704.36)
937,704.36
12
01-01-2010
34,800.00
28,131.13
6,668.87
(61,035.49)
931,035.49
13
01-07-2010
34,800.00
27,931.06
6,868.94
(54,166.56)
924,166.56
14
01-01-2011
34,800.00
27,725.00
7,075.00
(47,091.55)
917,091.55
15
01-07-2011
34,800.00
27,512.75
7,287.25
(39,804.30)
909,804.30
16
01-01-2012
34,800.00
27,294.13
7,505.87
(32,298.43)
902,298.43
17
01-07-2012
34,800.00
27,068.95
7,731.05
(24,567.38)
894,567.38
18
01-01-2013
34,800.00
26,837.02
7,962.98
(16,604.40)
886,604.40
19
01-07-2013
34,800.00
26,598.13
8,201.87
(8,402.53)
878,402.53
20
01-01-2014
34,800.00
26,352.08
8,402.53
(0.00)
870,000.00
Totals
696,000.00
566,545.71
129,408.90
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