colorado sports ltd. is authorized to issue $5000000 of 4%, 10 years bond payabl
ID: 2480181 • Letter: C
Question
colorado sports ltd. is authorized to issue $5000000 of 4%, 10 years bond payable. On December 31,2014, when the market interest rate is 4.5%, the company issues $3200000 of the bonds. Colorado sports amortizes bond discount by the effective-interest method.The semiannual interest dates are june 30 and december 31. use the pv function in microsoft excel to calculate the issue price of the bonds! Prepare a bond amortization table for the term of the bonds! Record insurance of the bonds payable on December 31, 2014, the first semiannual interest payment on june 30, 2015 and the second payment on December 31, 2015!
Explanation / Answer
Solution:
Par Value of the Bonds issued = $3,200,000
Coupon Rate = 4% annual or 2% semi annual
Coupon Interest Amount to be paid on each interest payment date = $3,200,000 x 2% = $64,000
Calculation of Issue Price of the bonds
Market Interest Rate (R) = 4.5% annual or 2.25% semi annual
Number of Interest Payments = 10 years 2 = 20
Issue Price of the bonds = Coupon Payment x PVIFA (2.25%, 20) + Par Value x PVIF (2.25%, 20)
= ($64,000 x 15.9637123686) + ($3,200,000 x 0.64081647159)
= $1,021,678 + $2,050,612
= $3,072,290
Since, Issue price is less than the par value, bonds are issued at discount.
Discount on Bonds Payable = Par Value – Issue Price = $3.200.000 - $3,072,290 = $127,710
Discount on Bonds Payable is amortized over the life of Bonds using effective interest method.
Amortization Schedule for Discount on Bonds Payable for the term of the bond
Payment intervals
Date
Bond Interest Payable (Par Value of the bonds x Coupon Rate semi annual)
Bond Interest Expenses (Beginning Book Value @ 2.25% semiannual Market Interest Rate)
Amount of Bond Discount to be Amortized with each interest payment (Interest Expenses - Interest Payable)
Balance of Unamortized Discount on Bonds Payable
Par Value of Bonds Payable
Book Value (Par Value - Balance of Unamortized Bond Discount)
0
Dec 31, 2014
$127,710
$3,200,000
$3,072,290
1
June 30, 2015
$64,000
$69,127
$5,127
$122,583
$3,200,000
$3,077,417
2
Dec 31, 2015
$64,000
$69,242
$5,242
$117,342
$3,200,000
$3,082,658
3
June 30, 2016
$64,000
$69,360
$5,360
$111,982
$3,200,000
$3,088,018
4
Dec 31, 2016
$64,000
$69,480
$5,480
$106,501
$3,200,000
$3,093,499
5
June 30, 2017
$64,000
$69,604
$5,604
$100,898
$3,200,000
$3,099,102
6
Dec 31, 2017
$64,000
$69,730
$5,730
$95,168
$3,200,000
$3,104,832
7
June 30, 2018
$64,000
$69,859
$5,859
$89,309
$3,200,000
$3,110,691
8
Dec 31, 2018
$64,000
$69,991
$5,991
$83,319
$3,200,000
$3,116,681
9
June 30, 2019
$64,000
$70,125
$6,125
$77,193
$3,200,000
$3,122,807
10
Dec 31, 2019
$64,000
$70,263
$6,263
$70,930
$3,200,000
$3,129,070
11
June 30, 2020
$64,000
$70,404
$6,404
$64,526
$3,200,000
$3,135,474
12
Dec 31, 2020
$64,000
$70,548
$6,548
$57,978
$3,200,000
$3,142,022
13
June 30, 2021
$64,000
$70,695
$6,695
$51,282
$3,200,000
$3,148,718
14
Dec 31, 2021
$64,000
$70,846
$6,846
$44,436
$3,200,000
$3,155,564
15
June 30, 2022
$64,000
$71,000
$7,000
$37,436
$3,200,000
$3,162,564
16
Dec 31, 2022
$64,000
$71,158
$7,158
$30,278
$3,200,000
$3,169,722
17
June 30, 2023
$64,000
$71,319
$7,319
$22,960
$3,200,000
$3,177,040
18
Dec 31, 2023
$64,000
$71,483
$7,483
$15,476
$3,200,000
$3,184,524
19
June 30, 2024
$64,000
$71,652
$7,652
$7,824
$3,200,000
$3,192,176
20
Dec 31, 2024
$64,000
$71,824
$7,824
$0
$3,200,000
$3,200,000
Total:
$1,280,000
$1,407,710
$127,710
$1,307,422
(a) The Journal Entry on December 31, 2014 to record the issuance of the bonds
Date
Account Title and Explanation
Debit
Credit
Dec 31, 2014
Cash A/c Dr.
$3,072,290
Discount on Bonds Payable Dr.
$127,710
To Bonds Payable
$3,200,000
(Being the bonds issued at disocunt)
b)
Journal Entry to record first semiannual interest payment on June 30, 2015
Date
Account Title and Explanation
Debit
Credit
June 30, 2015
Interest Expenses Dr.
$69,127
To Discount on Bonds Payable
$5,127
To Interest Payable to Bond Holders
$64,000
(being Interest expenses recorded)
Journal Entry to record second semiannual interest payment on Dec 31, 2015
Date
Account Title and Explanation
Debit
Credit
Dec 31, 2015
Interest Expenses Dr.
$69,242
To Discount on Bonds Payable
$5,242
To Interest Payable to Bond Holders
$64,000
(being Interest expenses recorded)
On Cash payment of Interest to Bond Holders
Date
Account Title and Explanation
Debit
Credit
June 30 & Dec 31, 2015
Interest Payable to Bond Holders Dr.
$64,000
To Cash A/c
$64,000
(Cash Interest paid to bond holders)
Payment intervals
Date
Bond Interest Payable (Par Value of the bonds x Coupon Rate semi annual)
Bond Interest Expenses (Beginning Book Value @ 2.25% semiannual Market Interest Rate)
Amount of Bond Discount to be Amortized with each interest payment (Interest Expenses - Interest Payable)
Balance of Unamortized Discount on Bonds Payable
Par Value of Bonds Payable
Book Value (Par Value - Balance of Unamortized Bond Discount)
0
Dec 31, 2014
$127,710
$3,200,000
$3,072,290
1
June 30, 2015
$64,000
$69,127
$5,127
$122,583
$3,200,000
$3,077,417
2
Dec 31, 2015
$64,000
$69,242
$5,242
$117,342
$3,200,000
$3,082,658
3
June 30, 2016
$64,000
$69,360
$5,360
$111,982
$3,200,000
$3,088,018
4
Dec 31, 2016
$64,000
$69,480
$5,480
$106,501
$3,200,000
$3,093,499
5
June 30, 2017
$64,000
$69,604
$5,604
$100,898
$3,200,000
$3,099,102
6
Dec 31, 2017
$64,000
$69,730
$5,730
$95,168
$3,200,000
$3,104,832
7
June 30, 2018
$64,000
$69,859
$5,859
$89,309
$3,200,000
$3,110,691
8
Dec 31, 2018
$64,000
$69,991
$5,991
$83,319
$3,200,000
$3,116,681
9
June 30, 2019
$64,000
$70,125
$6,125
$77,193
$3,200,000
$3,122,807
10
Dec 31, 2019
$64,000
$70,263
$6,263
$70,930
$3,200,000
$3,129,070
11
June 30, 2020
$64,000
$70,404
$6,404
$64,526
$3,200,000
$3,135,474
12
Dec 31, 2020
$64,000
$70,548
$6,548
$57,978
$3,200,000
$3,142,022
13
June 30, 2021
$64,000
$70,695
$6,695
$51,282
$3,200,000
$3,148,718
14
Dec 31, 2021
$64,000
$70,846
$6,846
$44,436
$3,200,000
$3,155,564
15
June 30, 2022
$64,000
$71,000
$7,000
$37,436
$3,200,000
$3,162,564
16
Dec 31, 2022
$64,000
$71,158
$7,158
$30,278
$3,200,000
$3,169,722
17
June 30, 2023
$64,000
$71,319
$7,319
$22,960
$3,200,000
$3,177,040
18
Dec 31, 2023
$64,000
$71,483
$7,483
$15,476
$3,200,000
$3,184,524
19
June 30, 2024
$64,000
$71,652
$7,652
$7,824
$3,200,000
$3,192,176
20
Dec 31, 2024
$64,000
$71,824
$7,824
$0
$3,200,000
$3,200,000
Total:
$1,280,000
$1,407,710
$127,710
$1,307,422
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