Need help Journalizing Bonds at different percent levels 1. On July 1 2011, a co
ID: 2483006 • Letter: N
Question
Need help Journalizing Bonds at different percent levels
1. On July 1 2011, a corporation sold $1,000,000, 12%, 5 years bond at par value. Interest paid semiannually.
(a) Make a journal entry for the issuance of the bond
(b) Make a journal entry for the first interest payment
(c) Make a journal entry to pay off the bond at maturity after 5 years.
2. On April 1 2011, a corporation sold $1,000,000, 12%, 5 years bond at 95. Interest paid semiannually.
(a) Make a journal entry for the issuance of the bond
(b) Make a journal entry for the first interest payment
(c) Make a journal entry to accrue the interest expense on December 31
3. On January 1 2011, a corporation sold $1,000,000, 12%, 5 years bond. The current market rate is 10%. Interest paid semiannually.
(a) Make a journal entry for the issuance of the bond (i.e. what is the bond price?)
(b) Make a journal entry for the first interest payment
(c) Make a journal entry to retire 20% of the bonds at 102 on January 1 2013
Explanation / Answer
1.
01 July 2011
Cash A/C Dr 1000000
To Bond payable A/C 1000000
(For Bond issued at par)
2.
31 Dec 2011
Interest expense A/C Dr 60,000
To Cash A/C 60,000
(For interest paid)
3.
01 July 2016
Bond payable A/C Dr 1000000
To Cash A/C 1000000
(For bond repayment)
Calculation of interest=Principal * Rate of interest * time=1000000*12/100*1/2=60000 half yearly
2.
01 April 2011
Cash A/C Dr 950000
Discount on bond issue A/C Dr 50000
To Bond payable A/C 1000000
(For Bond issued at par)
2.
30 Sep 2011
Interest expense A/C Dr 60,000
To Cash A/C 60,000
(For interest paid)
3.
31 Dec 2016
Interest expense A/C Dr 30,000
To Accrued interest 30,000
(For interest accrued for three months)
Calculation of first payment of interest=Principal * Rate of interest * time=1000000*12/100*1/2=60000 half yearly
Calculation of accrued interest on Dec 31=Since last interest was paid on Sep 30,we need to accrue interest expense for 3 months on Dec 31 starting Oct till Dec 31
Here is the calculation:
Accrued interest for 3 months=1000000*12/100*3/12=30,000
3. In this case , since market is offering lesser rate than the bond , the investors will be ready to more than the par value to invest in the bond.
Hence, the bond will be sold at a premium which means bond will be issued at a price more than the face value.
Now to calculate the amount that the investors will be ready to pay for such a bond and the amount of premium thereon , we will have to calculate the present value of bond’s interest payments and the maturity amounts.
Price of bond=Present value of interest payments + Present value of maturity value.
Interest=1000000*12/100*6/12=60,000 semi annual
Bond maturity value=1000000
Market interest rate=10%=5% semi annually
Number of years=5 years=10 half year
Price of bond=CF1/ (1+interest rate)+ CF 2/(1+Interest rate)^2……………………CF10 /(1+Interest)^10 + Par value/(1+Interest rate)^10
Price of bond=60000/ (1+.05)…………….+60000/(1+.05)^10 + 1000000/(1+.05)^10
Value of bond=1077217.35
Issue price per share=1077217.35/10000=$107.72
Premium on bond=Issue price-Par value=107.22-100=7.22
Cash A/C Dr 1077217.35
To Premium on bond issue A/C 77217.35
To Bond payable A/C 1000000
(For bond issue at premium)
Interest expense A/C Dr 60000
To Cash A/C 60000
(Interest payment half year)
Number of bond units to be redeemed=200000/100=2000 units
Carrying value of 20,000 units=Par value+ Premium on bond issue=200000+ (2000*7.22) 14440=214440
These 2000 units will be redeemed at 102
Redemption value=2000*102=204000
Gain on redemption=Bond’s carrying value-Redemption value=214440-204000=10440
01 Jan ,2013
Bond payable A/C Dr 200000
Premium on bonds A/C Dr 14440
To Gain on redemption A/C 10440
To Cash A/C 204000
(Redemption of bond)
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