On January 1, 2013, Lowry Company issued ten-year bonds with a face value of $50
ID: 2461873 • Letter: O
Question
On January 1, 2013, Lowry Company issued ten-year bonds with a face value of $500,000 and a stated interest rate of 10%, payable semiannually on June 30 and December 31. The market rate for bonds of this type would be 12%. Calculate the issue price of the bonds and the journal entry to record the issuance. Prepare the amortization table for the bonds for January 1, 2013- December 31, 2015. Prepare the necessary journal entry at December 31, 2013. Prepare the necessary journal entry at June 30,2015. Assume that the bonds are redeemed on January 1, 2016 for 102. Prepare the journal entry to record redemption. Suppose that the issuance date had been April 1, 2013 for bonds that were dated January 1, 2013. How would the journal entry have changed for the issuance of the bonds?Explanation / Answer
Solution.
(a) Calculation of the issue price of the bond and the journal entry to record the issuance.
Issue price = Face value of bonds X *Present value factor @12% for 10 years(1/1.12 for 10 years)
= $500,000 X 0.321973236
= $1,60,9866
*Present value factor of 10 years @ 12 % = 1 / (1+r)n
= 1 / (1+.12)10
= 0.321973236
Journal entry to record the issuance.
Bank Dr. 500,000
To Bond Payable 500,000
( Record the issuance of 10%Bond payable semianually )
(c) Journal entry at December 31,2013.
As interest is due for December 31,2013 then the interest will be calculated as below :
Inrerest of bond = 500,000 X 10% X 6/12
= 25,000
Journal entry
Interest Expense Dr. 25,000
To Cash 25,000
( Record Interest expenses on december 31, 2013 )
(d) Journal entry at June 30,2015
Inrerest of bond for six month = 500,000 X 10% X 6/12
= 25,000
Journal entry
Interest Expense Dr. 25,000
To Cash 25,000
( Record Interest expenses on june 30, 2015 )
(e) Journal entry for redemption of bond on January 1, 2016 for 102.
Cash Dr. 5,100,000
To Premium on redemption of bond 100,000
To Bond Payable 5,000,000
( Redemption of bond at $102 on january 1, 2013 )
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