On January 1, 2018, Splash City issues $500,000 of 9% bonds, due in 20 years, wi

Question

On January 1, 2018, Splash City issues $500,000 of 9% bonds, due in 20 years, with interest payable semiannually on June 30 and December 31 each year. Required: Assuming the market interest rate on the issue date is 10%, the bonds will issue at $457,102. 1. Complete the first three rows of an amortization table. 2. Record the bond issue on January 1, 2018, and the first two semiannual interest payments on June 30, 2018, and December 31, 2018. On January 1, 2018, Splash City issues $500,000 of 9% bonds, due in 20 years, with interest payable semiannually on June 30 and December 31 each year. Required: Assuming the market interest rate on the issue date is 10%, the bonds will issue at $457,102. 1. Complete the first three rows of an amortization table. 2. Record the bond issue on January 1, 2018, and the first two semiannual interest payments on June 30, 2018, and December 31, 2018. Required: Assuming the market interest rate on the issue date is 10%, the bonds will issue at $457,102. 1. Complete the first three rows of an amortization table. 2. Record the bond issue on January 1, 2018, and the first two semiannual interest payments on June 30, 2018, and December 31, 2018.

Explanation / Answer

SOLUTION

(1) Amortization table-

Explanation -

Cash paid = Face amount * 4.5% Stated rate

Interest expense = Carrying value * 5% Market rate

Increase in carrying value = Interest expense - Cash paid

Carrying value = Prior carrying value + Increase in carrying value

(2) Journal entries-

Date Cash Paid($) Interest expense ($) Increase in carrying value ($) Carrying value ($) 1/1/18 457,102 6/30/18 22,500 22,855 355 457,457 12/31/18 22,500 22,873 373 457,830

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