Note: You MUST use the Time Value of Money factors to complete this assignment.
ID: 2563072 • Letter: N
Question
Note: You MUST use the Time Value of Money factors to complete this assignment. Answers determined using a financial calculator will not be accepted.
Problem 1 – Comprehensive Bond Problem
On January 1, 2016, Dudley Company issued $800,000 of five-year, 6% face value bonds that pay interest semi-annually each June 30 and December 31. The bonds were issued to yield an 8% return.
Required:
1. a. Prepare the journal entry to record the issuance of the bond.
1-b- Prepare an amortization table for all years of the bond’s life to record the amortization of the premium or discount, using the effective interest method.
1-c Prepare the journal entry for the first two interest payments, assuming that Dudley uses the effective-interest method to amortize the premium or discount. (Your figures will come from the amortization table).
1-d Prepare the journal entry for the first interest payment, assuming that Dudley uses the straight-line method to amortize the premium or discount.
1-e Assume that, on December 31, 2018, Dudley redeemed all of the outstanding bonds at 103.Prepare the journal entries for this transaction. Use your amortization tables to help you determine the carrying value of the bond at the time of redemption.
2-Repeat requirements “1a” through “1d” assuming that the bonds issued had a stated rate of 10% instead of 6%. (The yield is still 8%).
3-Looking at your amortization tables for both scenarios, does your INTEREST EXPENSE increase or decrease each period when you amortize a discount? What about when you amortize a premium?
4-Looking at your amortization tables for both scenarios, does your CARRYING VALUE increase or decrease each period when you amortize a discount? What about when you amortize a premium?
5-Looking at your amortization tables for both scenarios, what do you notice about the AMOUNT OF AMORTIZATION (the difference between your interest paid and the interest expense) each period? Does it increase or decrease each period when amortizing a discount? What about when you are amortizing a premium?
6-Looking at your amortization table, when amortizing a premium using the effective interest method, is your interest expense in the earlier years greater than or less than it is when amortizing your premium using the straight-line method? What about in later years?
7-Looking at your amortization table, when amortizing a discount using the effective interest method, is your interest expense in the earlier years greater than or less than it is when amortizing your discount using the straight-line method? What about in later years?
Please show all calculations, thanks.
Explanation / Answer
Answer:
1) Calculation of actual price of bonds on Dec 31, 2018
Face Value of the bonds = $800,000
Coupon Rate = 6%
Semi Annual Interest Payment = Face Value 800,000*6%*1/2 = $24,000
Semi Annual maturity period (n) = 5*2 = 10
Current Market Interest Rate (R) = 8% annually or 4% semi annual market interest rate
Issue (Current) Price of Bond = Semi Annual Coupon Interest x PVIFA (R, n) + Par Value x PVIF (R, n)
Here,
R = Semi Annual Market Interest Rate = 4%
N = periods to maturity = 10
Par Value = Face Value = $800,000
PVIFA (R, n) = Present Value interest factory for annuity at 4% for 10 periods = (1 – 1/(1/R)n) / R
= (1 – 1/(1+0.04)10) / 0.04
= 8.1109
PVIF (R, n) = Present Value interest factor for 10 period at 4% = 1/(1+R)n = 1/(1+0.04)10 = 0.67556
Issue/Current Price of bond = Semi Annual Coupon Interest x PVIFA (R, n) + Par Value x PVIF (R, n)
= (24,000*8.1109) + (800,000*0.67556)
= 194662 + 540448
=735,110
1-a) Journal entry to record issuance of bond
Date
Accounts
Debit
Credit
Jan.1, 2016
Cash
$735,110
Discount on Bonds Payable
$64,890
Bonds Payable
$800,000
(Bonds are issued at discount recorded)
1-b) Amortization Table using effective interest rate
Schedule of Amortization of Bond Discount (Effective Rate Method)
Payment intervals
Period End
Cash Interest (Par Value of the bonds 800,000 x Coupon Rate 6%*1/2 semi annual)
Interest Expenses (Book Value of Bonds x Market Interest Rate 8%*1/2)
Amortization of Bond Discount (Interest Expenses - Cash Interest)
Balance of Unamortized Discount on Bonds Payable
Par Value of Bonds Payable
Book Value (Par Value - Balance of Unamortized Bond Discount)
0
Jan.1, 2016
$64,890
$800,000
$735,110
1
June.30, 2016
$24,000
$29,404
$5,404
$59,486
$800,000
$740,514
2
Dec.31, 2016
$24,000
$29,621
$5,621
$53,865
$800,000
$746,135
3
June.30, 2017
$24,000
$29,845
$5,845
$48,020
$800,000
$751,980
4
Dec.31, 2017
$24,000
$30,079
$6,079
$41,940
$800,000
$758,060
5
June.30, 2018
$24,000
$30,322
$6,322
$35,618
$800,000
$764,382
6
Dec.31, 2018
$24,000
$30,575
$6,575
$29,043
$800,000
$770,957
7
June.30, 2019
$24,000
$30,838
$6,838
$22,204
$800,000
$777,796
8
Dec.31, 2019
$24,000
$31,112
$7,112
$15,093
$800,000
$784,907
9
June.30, 2020
$24,000
$31,396
$7,396
$7,696
$800,000
$792,304
10
Dec.31, 2020
$24,000
$31,696
$7,696
$0
$800,000
$800,000
1-c) Journal entry for two interest payment using effective interest rate
Date
Accounts
Debit
Credit
June.30, 2016
Interest Expense
$29,404
Discount on Bonds Payable
$5,404
Interest Payable
$24,000
(First semi annual interest expense recorded
Dec.31, 2016
Interest Expense
$29,621
Discount on Bonds Payable
$5,621
Interest Payable
$24,000
(Second semi annual interest expense recorded
1-d) First two interest payment using straight line method
As per Straight line method, the discount on bonds payable is amortized over the life of bonds with equal amortize amount.
Straight line Semi Annual Bond Amortization = Total Discount / Semi annual maturity period
= 64890 / 10
= $6,489
Date
Accounts
Debit
Credit
June.30, 2016
Interest Expense
$30,489
Discount on Bonds Payable
$6,489
Interest Payable
$24,000
(First semi annual interest expense recorded
Dec.31, 2016
Interest Expense
$30,489
Discount on Bonds Payable
$6,489
Interest Payable
$24,000
(Second semi annual interest expense recorded
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Pls ask separate question for remaining part.
Date
Accounts
Debit
Credit
Jan.1, 2016
Cash
$735,110
Discount on Bonds Payable
$64,890
Bonds Payable
$800,000
(Bonds are issued at discount recorded)
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