Time for a bond payable problem. Since you are really great about creating your

Question

Time for a bond payable problem.

Since you are really great about creating your own problems, how about creating a bond problem? Please provide the following:

i.Date of issuance.

ii.The bond must be issued at a premium.

iii.The bond must have a maturity of at least eight years.

iv.The bond must pay interest semi annual.

v.Determine the principal, stated interest rate, market interest rate, and maturity for your bond.

Required:           

A.Calculate the annuity and the number of periods.

B.Compute the present value for the bond on 07/01/12, either using Excel or the tables at the end of the book.

C.Prepare the journal entry when the bond was issued.

D.Prepare the journal entries for the first interest payment.

E.Determine the amount of expenses that will be reported on the income statement for Year #2

F.Review you journal entries in in D and explain why the amount of cash paid to the bond holders is different from the expense reported on the income statement.

G.Explain why you company needs the additional capital (cash) provided by the bond

Explanation / Answer

Creation of Bond Problem

The 10% bond of $100,000 of face value $1,000 is issued at a premium of 5% (i.e.$50) on 07/01/2012. The bond has a matuarity of 10 years. The market interest rate is 8%. The interest is paid semi annually.

Requirements of Problem

A.) Rate of interest for each semi annual period = (10%/2) = 5%

No. of semi annual periods = 10 years*2 = 20

Annuity for each period = 100,000*5% = 5,000

B.) Calculation of Present value of the bond (Amount in $)

C.) Journal Entry when the bond issued (Amount in $)

D.) Journal Entry for first interest payment (Amount in $)

Interest Amount 5,000 PVAF(5%,20) 12.4622 PV of Interest (12.4622*5,000) (i) 62,311 Redemption Amount 100,000 PVF(5%,20) 0.3769 PV of Redemption amount (100,000*0.3769) (ii) 37,690 PV of the bond (i)+(ii) 100,001

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