On January 1, 2016, Diamond Enterprises issued 4% coupon bonds dated January 1,

Question

On January 1, 2016, Diamond Enterprises issued 4% coupon bonds dated January 1, 2016, with a face amount of $20 million. The bonds mature in 10 years. For bonds of similar risk and maturity, the market yield is 6%. Interest is paid semiannually on June 30 and December 31. All dollar amounts should be rounded to the nearest dollar. 1) What would Diamond Enterprises show on its balance sheet as the net book value of these bonds as of January 1, 2022? Show your calculations. 2) The company decided to retire (repurchase) half of the bonds on January 1, 2022 when the market rate of interest had risen to 7.0%. Provide the journal entry Diamond Enterprises would record to account for the repurchase of the bonds. Show all calculations.

Explanation / Answer

Calculation of Discount on Issue of Bonds PV of 20 Millions received in 20 Periods          11,074,000 (20,000,000 X 0.5537) PV of $400,000 recd for each 20 Periods            5,951,000 ($400,000 X 14.8775) Present Value (Issue Price of Bonds)          17,025,000 Value of Bonds Issued          20,000,000 Discount on Issue of Bonds            2,975,000 Bond Discount Amortization Schedule A B C D E Date Interest Payment (20,000,000 X 2%) Interest Expense (Preceeding Bond Carrying Amount X 3%) Discount Amortization (B-A) Unamortized Discount (D-C) Bond Carrying Amount (20,000,000-D) 01/01/2016                           -                              -                              -                   2,975,000         17,025,000 30/06/2016                400,000                510,750                110,750                 2,864,250         17,135,750 31/12/2016                400,000                514,073                114,073                 2,750,178         17,249,823 30/06/2017                400,000                517,495                117,495                 2,632,683         17,367,317 31/12/2017                400,000                521,020                121,020                 2,511,663         17,488,337 30/06/2018                400,000                524,650                124,650                 2,387,013         17,612,987 31/12/2018                400,000                528,390                128,390                 2,258,624         17,741,376 30/06/2019                400,000                532,241                132,241                 2,126,382         17,873,618 31/12/2019                400,000                536,209                136,209                 1,990,174         18,009,826 30/06/2020                400,000                540,295                140,295                 1,849,879         18,150,121 31/12/2020                400,000                544,504                144,504                 1,705,375         18,294,625 30/06/2021                400,000                548,839                148,839                 1,556,537         18,443,463 31/12/2021                400,000                553,304                153,304                 1,403,233         18,596,767 Answer 1. Balance Sheet (Partial) As on Jan 1, 2022 Long Term Liablity Bonds Payble - 4%          20,000,000 Less: Discount on Issue of Bonds            1,403,233 Net Bonds Payable          18,596,767 Answer. 2. Calculation of Value of 50% Bonds on Jan. 1, 2012 PV of 10 Millions received in 8 Periods            7,594,000 (20,000,000 X 0.7594) PV of $200,000 recd for each 8 Periods            1,374,800 ($200,000 X 6.8740) Present Value of Bonds on 1/1/2022 - 50%            8,968,800 Journal Entry Date Particulars Dr. Amt Cr. Amt 01/01/2022 Bonds Payable                           Dr.         9,298,384 Discount on Issue of Bonds Dr.            701,616     To Cash          8,968,800     To Gain on Retirement of Bonds          1,031,200

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