Determining the present value of bonds payable and journalizing using the effect

Question

Determining the present value of bonds payable and journalizing using the effective-interest amortization method Nicholas Rausch issued $300,000 of 11%, 10-year bonds payable on January 1, 2014. The market interest rate at the date of issuance was 10%, and the bonds pay interest semiannually. Requirements 1.How much cash did the company receive upon issuance of the bonds payable? (Round all numbers to the nearest whole dollar). 2.Prepare an amortization table for the bonds using the effective-interest method, through the first two interest payments. (Round all numbers to the nearest whole dollar) 3.Journalize the issuance of the bonds on January 1, 2014, and payments of the first semiannual interest amount and amortization of the bond June 30, 2014. Explanation are not required.

Explanation / Answer

1. Bond Price = C * {1 - 1/(1+i)^n} / i + M/(1+i)^n

C = Coupon payment = 300000 * 11% *1/2 = $16500

i = 10/2 = 5%

n = 10*2 = 20

Bond Price = 16500 * {1 - 1/(1+.05)^20} / i + 300000/(1+.05)^20

= $318693 (approx)

2. The bond is issued at a premium of $18693. This shall be amortized over the life of the bond.

The interest expense to be recognized shall be 5.5% of book value at begining of the year.

30 June 2014 Interest = 5%*318693 = $15935

Bond premium to be written off = $16500 - $15935 = $565

Bond book value at period 2 of interest payment = $318693 - $565 = $318128

31 Dec 2014 Interest = 5%*318128 = $15906

Bond premium to be written off = $16500 - $15906 = $593

3. On Jan 1 2014: Bank Dr $318693

To Bonds Payable $300000

To premium on issue of bond $18693

On Jun 30 2014: Interest Expense Dr $15935

Premium on issue of bond Dr $565

To Bank $16500

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