A company issued 10%, 10 year bonds with a par value of 1,000,000 on January 1,
ID: 2491127 • Letter: A
Question
A company issued 10%, 10 year bonds with a par value of 1,000,000 on January 1, 2013, at a selling price of 885,295, to yeild the buye12% return. The company uses effective interest amortization method. Interest is paid semiannually each June 30 and December 31.
Prepare an amortization table for the first two payment periods using the format shown below:
Semiannual interest period, Cash interest paid, bond interest expense, discount amortization, unamortization and carrying value.
prepare the journal entry to record the first semiannual interest payment.
Explanation / Answer
Carrying value of bond CV= 885,295
Face value FV = 1,000,000
Semiannual coupon rate = 10%/2 = 5%
Semiannual YTM= 12%/2 = 6%
Cash interest paid = FV x semiannual coupon rate
Interest expense = FV x semiannual YTM
Amortization table:
Period
Cash Interest paid
Bond Interest Expense
Discount Amortization
Carrying value
0
-
-
-
885295
1
1000,000x5% = 50,000
885295x6% = 53117.70
53117.70-50000= 3117.70
885295+3117.70=888,412.70
2
1000,000x5% = 50,000
888412.70x6% = 53304.76
53304.76-50000=3304.76
888412.70+3304.76 =89717.46
Journal Entry:
Interest Expense - Debit 53117.70
Discount on issue of Bond- Credit 3117.70
Cash -credit 50,000
Period
Cash Interest paid
Bond Interest Expense
Discount Amortization
Carrying value
0
-
-
-
885295
1
1000,000x5% = 50,000
885295x6% = 53117.70
53117.70-50000= 3117.70
885295+3117.70=888,412.70
2
1000,000x5% = 50,000
888412.70x6% = 53304.76
53304.76-50000=3304.76
888412.70+3304.76 =89717.46
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