Problem I On January 1, 2007, Lowry Co. issued 5-year bonds with a face value of

Question

Problem I On January 1, 2007, Lowry Co. issued 5-year bonds with a face value of $5,000,000 and a stated interest rate of 8%, payable semiannually on June 30 and December 31, The bonds were sold to yield 10%. Table values are: Present value of 1 for 5 periods at 8% Present value of 1 for 5 periods at 10% Present value of 1 for 10 periods at 5% Present value of 1 for 10 periods at 4% Present value of annuity for 5 periods at 10%?........................ Present value of annuity for 5 periods at 8% Present value of annuity for 10 periods at 4% Present value of annuity for 10 periods at 5% 680 620 614 .675 3.790 3.992 8.110 7721 , Instructions (a) Calculate the issue price of the bonds. (b) Record the bond issue c) Calculate and record interest expense for the first period. an-orti3 atan Schedule C-re

Explanation / Answer

a) Issue price of Bonds $ 46,14,200 Working: Issue price of bonds is the present value of cash flows from bonds -(1) Coupon Payments and (2) Maurity Payment 1) Par Value a $       50,00,000 Semi annual Coupon b=a*4% $          2,00,000 Semi annual Yield 5% Semi annual Life 10 2) Present Value of coupon interest = Coupon Payment x Present Value of Annuity for 10 periods at 5% = $   2,00,000 x 7.721 = $       15,44,200 Present Value of Par Value = Par Value x Present Value of 1 for 10 period at 5% = $ 50,00,000 x 0.614 = $       30,70,000 Price of Bonds = $       46,14,200 b) Date Account titles and explanation Debit Credit January 1, 2007 Cash $ 46,14,200 Discount on issuance of bonds $   3,85,800 Bonds Payable $       50,00,000 (To record issuance of bond) c) Interest expense for the first period = Issuance Price of Bonds x Semi annual Bond yield = $ 46,14,200 x 5% = $   2,30,710 Date Account titles and explanation Debit Credit June 30, 2007 Interest expense $   2,30,710 Discount on bonds payable $             30,710 Cash $          2,00,000 (To record interest expense for the first period) Working: Interest expense $   2,30,710 Coupon paid in cash $   2,00,000 discount amortised $       30,710 d) Amorization Schedule: Semi annual periods Interest Expenses Interest Paid in cash Discount amortised Unamortised discount Carrying Value January 1, 2017 $ 3,85,800 $ 46,14,200 June 30, 2017 $   2,30,710 $ 2,00,000 $             30,710 $ 3,55,090 $ 46,44,910 Dec 31, 2017 $   2,32,246 $ 2,00,000 $             32,246 $ 3,22,845 $ 46,77,156 June 30, 2018 $   2,33,858 $ 2,00,000 $             33,858 $ 2,88,987 $ 47,11,013 Dec 31, 2018 $   2,35,551 $ 2,00,000 $             35,551 $ 2,53,436 $ 47,46,564 June 30, 2019 $   2,37,328 $ 2,00,000 $             37,328 $ 2,16,108 $ 47,83,892 Dec 31, 2019 $   2,39,195 $ 2,00,000 $             39,195 $ 1,76,913 $ 48,23,087 June 30, 2020 $   2,41,154 $ 2,00,000 $             41,154 $ 1,35,759 $ 48,64,241 Dec 31, 2020 $   2,43,212 $ 2,00,000 $             43,212 $     92,547 $ 49,07,453 June 30, 2021 $   2,45,373 $ 2,00,000 $             45,373 $     47,174 $ 49,52,826 Dec 31, 2021 $   2,47,174 $ 2,00,000 $             47,174 $              -0 $ 50,00,000 (Amount of $ 467 has been adjusted in interest expense in last period)

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