Jaytown Inc. issues $500,000 in bonds that pay 10% annual interest with two semi
ID: 2466985 • Letter: J
Question
Jaytown Inc. issues $500,000 in bonds that pay 10% annual interest with two semi-annual payments. The date of Issuance is January 1, 2016, and the interest is paid on June 30 and December 31. The bonds mature after 15years and discounts or premiums are amortized using the straight-line method. Part A Required - Assuming the bond market rate of interest is $%. 1. What is the total bond interest expense that will be recognizes over the file of the hood? 2. Prepare the journal entry in the issue date to issue the bonds. 3. Prepare the journal retry for the June 30, 2016. 4. Prepare the journal entry for the December 31, 2016.Explanation / Answer
Solution:
Par Value of Bonds = $500,000
Semi Annual Coupon Interest Amount = $500,000 x 10% x ½ = $25,000
Total number of interest payment during the life of the bond = 15 x 2 = 30
Market Rate of Interest = 8% p.a. or 4% semi annually
Hence, the current market price of bonds = Coupon Interest x PVIFA (4%, 30) + Maturity Value x PVIF (4%, 30)
= ($25,000 x 17.292) + ($500,000 x 0.30832)
= $432,300 + $154,160
= $586,460
Current Market Price of the bonds is higher than par value, it means bonds are issued at premium.
Premium on Bonds Payable = Issue Price – Par Value = $586,460 - $500,000 = $86,460
Premium on Bonds Payable $86,460 are amortized over the life of the bonds. On each interest payment premium of amount $2,882 ($86,460 / 30) is amortized.
Total Interest to be paid during the life of bond = $500,000 x 10% x 15 = $750,000
1)
The amount of total Interest Expenses will be recognized over the life of the bond = Total Interest Payment – Premium on Bonds Payable = $750,000 - $86,460 = $663,540
2)
Journal Entry to issue the bond
Date
Account Titles
Debit
Credit
January 1, 2016
Cash A/c Dr.
$586,460
To Bonds Payable
$500,000
To Premium on Bonds Payable
$86,460
(being bonds are issued at premium)
3)
Journal Entry for June 30, 2016
Date
Account Titles
Debit
Credit
June 30, 2016
Interest Expenses Dr.
$22,118
Amortized Premium on Bonds Payable Dr.
$2,882
To Cash Interest Payable To bondholders
$25,000
(being interest expenses recorded)
June 30, 2016
Cash Interest Payable To bondholders Dr.
$25,000
To Cash A/c
$25,000
(being cash interest paid to bondholders
4)
Journal Entry for December 31, 2016
Date
Account Titles
Debit
Credit
December 31, 2016
Interest Expenses Dr.
$22,118
Amortized Premium on Bonds Payable Dr.
$2,882
To Cash Interest Payable To bondholders
$25,000
(being interest expenses recorded)
December 31, 2016
Cash Interest Payable To bondholders Dr.
$25,000
To Cash A/c
$25,000
(being cash interest paid to bondholders
Date
Account Titles
Debit
Credit
January 1, 2016
Cash A/c Dr.
$586,460
To Bonds Payable
$500,000
To Premium on Bonds Payable
$86,460
(being bonds are issued at premium)
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