(a) On 1/1/2015, Shocker Company issued $100,000 face value bonds. The stated ra
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Question
(a) On 1/1/2015, Shocker Company issued $100,000 face value bonds. The stated rate for these bonds is 10%, and the interest is paid semi-annually, on June 30 and December 31. The market rate on the date of issue was 12%. Bonds mature in three years, on December 31, 2017. Required In the table provided, write the amount of the payment, and the date of all payments that must be made by Shocker Company to bond holders. Date Amount Date Amount
Date
Amount
(b) On 1/1/2015, Sooner Company issued $100,000 face value bonds that make semi-annually on June 30 and December 31. The coupon rate is 10% and each semi-annual payment is $5,000. The market rate on the date of issue was 8%. Bonds mature in five years, on December 31, 2019.
Required
On the date of issue, calculate the market price of the bond and record journal entry for the issuance of the bond. Show calculations.
(b)answer for Sooner Company here:
Market Price of the bond on 1/1/2015 is:
Journal entry to be recorded on 1/1/2015:
Calculations for Sooner Company:
Number of period = ___ discount rate to be used = ___ %
Market Price of the bonds:
=
=
(c) On 1/1/2015, Gator Company issued $200,000 face value bonds that mature in five years, on December 31, 2019. The bonds have stated rate of 10%, with semi-annual payments, on June 30 and December 31. The market rate on the date of issue was 9%, and the bonds were sold for $207,913.
Required
In the amortization table provided, complete the entries for the dates indicated. Write journal entries to be recorded on 6/30/2015 and 12/31/2015.
Date
Cash Interest Paid
Interest Expense
Increase/decrease in Outstanding Balance
Outstanding Balance
1/1/2015
6/30/2015
12/31/2015
Date
Amount
Explanation / Answer
(a)
$100,000 10 percent 3-year bond issue with market interest rate of 12 percent.
Interest is paid semi-annually on June 30 and December 31.
We are using Straight line method here
Now Semi-annual interest is calculated as under:
Semi-Annual Interest Payment = Face value of bonds*Face interest rate * Time
= $100,000 * .10* .5
= $5,000
This interest expense will be paid every six months.
Date
Amount
01-06-2015
$5,000
Interest paid
31-12-2015
$5,000
Interest paid
01-06-2016
$5,000
Interest paid
31-12-2016
$5,000
Interest paid
01-06-2017
$5,000
Interest paid
31-12-2017
$105,000
Interest and Maturity Value paid
(b)
$100,000 10 percent 5-year bond issue with effective interest rate of 8 percent.
Market Price of the bond as on 01-01-2015 is calculated using the present values tables:
Now Semi-annual interest is calculated as under:
Semi-Annual Interest Payment = Face value of bonds*Face interest rate * Time
= $100,000 * .10* .5
= $5,000
Market Price is computed in below table:
Particulars
Amount
Present Value of Semiannual interest of $5,000 for 5 years is
$40,555
(5,000*8.111(Cumulative factor of 10 periods of 4%)
Present value of a single payment at the Maturity date
$100,000 *.676(Factor at end of 10th period of 4%)
$67,600
$108,155
Therefore, Maximum amount an investor pay is $108,155
Amortization of premium can be done by two methods:
Here we are following Straight line method
Bond Amortization by Straight Line Method
Bonds are issued at a premium when Market Interest Rate is less than the Face rate.
Here bonds are issued at $108,155 therefore bond premium will be amortized during the
life of the bond equally. (Using Straight Line method).
Unamortized Bond Premium is calculated as under:
Particulars
Amount
Face Value of Bonds
$100,000
Less:
Purchase price of Bonds
$108,155
(As calculated above
Unamortized Bond Premium
$8,155
Issuance of Bonds is recorded as under:
General Journal
Year
Particulars
L.F
Debit ($)
Credit ($)
2015
Jan-01
Cash
108,155
Unamortized Bond Premium
8,155
Bonds Payable
100,000
(For Sold $ 100,000 of 10%, 5-year bonds at 108,155)
(c)
$20,000 10 percent 5-year bond issued by GC at $207,913
Unamortized Bond Premium is calculated as under:
Particulars
Amount
Purchase price of Bonds
$207,913
Face Value of Bonds
$200,000
Unamortized Bond Premium
$7,913
Interest and bond premium amortized is calculated in below mentioned steps:
Interest payment = Per year interest payment* Life of bonds
= 2*5
= 10
Amortized Bond Premium = Bond Premium/Interest payments
= $7,913/10
= $791
Semi-Annual Interest Payment = Face value of bonds*Face interest rate * Time
= $200,000 * .10* .5
= $10,000
Interest expense semiannually = Interest payment – Amortization of Bond Premium
= $10,000 - $791
= $9,209
Bond earnings and carrying value is shown as under:
Semiannual Interest Period
Carrying Value at beginning of period
Semiannual Interest paid
Amortization of Bond Premium
Total Interest expense
0
$207,913
1
$207,913
$10,000
$791
$9,209
2
$207,122
$10,000
$791
$9,209
3
$206,331
$10,000
$791
$9,209
4
$205,540
$10,000
$791
$9,209
5
$204,749
$10,000
$791
$9,209
6
$203,958
$10,000
$791
$9,209
7
$203,167
$10,000
$791
$9,209
8
$202,376
$10,000
$791
$9,209
9
$201,585
$10,000
$791
$9,209
10
$200,794
$10,000
$791
$9,209
11
$200,003
Amortization table is completed as under
Date
Cash interest Paid
Interest Expense
Increase/Decrease in outstanding balance
Outstanding Balance
01-01-2015
0
0
0
$207,913
30-06-2015
$10,000
$9,209
$791
$207,122
31-12-2015
$10,000
$9,209
$791
$206,331
Journal Entry to record the interest expense by Straight Line method Method would be as
follows:
General Journal
Year
Particulars
L.F
Debit ($)
Credit ($)
2015
June 30
Bond Interest Expense
9,209
Unamortized Bond Premium
791
Cash
10,000
(For Paid semiannual interest to bondholders and amortized the premium)
December 31
Bond Interest Expense
9,209
Unamortized Bond Premium
791
Cash
10,000
(For Paid semiannual interest to bondholders and amortized the premium)
Date
Amount
01-06-2015
$5,000
Interest paid
31-12-2015
$5,000
Interest paid
01-06-2016
$5,000
Interest paid
31-12-2016
$5,000
Interest paid
01-06-2017
$5,000
Interest paid
31-12-2017
$105,000
Interest and Maturity Value paid
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