On January 1 2016, Natually Good Products issued $900,000 par value, 7%, five ye

Question

On January 1 2016, Natually Good Products issued $900,000 par value, 7%, five year bonds. Interest is payable semiannually at the end of the period. The market rate of interest on the date of the bond issue was 6%. The company's fiscal year ends on dec 31.

a) Determine issue price of debt.

b) Prepare Journal entry Record issuance of bonds payable. Record first semiannual interest payment. Record payment of the bonds at maturity.

Now, Prepare the journal entry to record the early retirement of the bonds at the end of the third year 2018 for 959,000

Explanation / Answer

Solution a:

Issue price of bond = Present value of interest and principal discounted at 6%

= ($900,000*7%*6/12) * cumulative PV factor at 3% for 10 periods + $900,000*PV factor at 3% for 10th period

= $31,500 * 8.530203 + $900,000 * 0.744094 = $938,386

Hence issue price of bond is $938,386

Solution b:

Let us assume that company is using effective interest method for premium amortization.

it is assumed that early retirement of bond at the end of 3rd year for $959,000 is including interest for 6th semi annual period.

Amortization of Premium using effective interest method Period Cash Paid Interest Amount Premium Amortization Carrying Value 1-Jan-16 $0 $0 $0 $938,386 30-Jun-16 $31,500 $28,152 $3,348 $935,038 31-Dec-16 $31,500 $28,051 $3,449 $931,589 30-Jun-17 $31,500 $27,948 $3,552 $928,036 31-Dec-17 $31,500 $27,841 $3,659 $924,377 30-Jun-18 $31,500 $27,731 $3,769 $920,609 31-Dec-18 $31,500 $27,618 $3,882 $916,727 30-Jun-19 $31,500 $27,502 $3,998 $912,729 31-Dec-19 $31,500 $27,382 $4,118 $908,611 30-Jun-20 $31,500 $27,258 $4,242 $904,369 31-Dec-20 $31,500 $27,131 $4,369 $900,000

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