Wishaw, Inc. produces and sells outdoor equipment. On July 1, 2014, Wishaw, Inc.

Question

Wishaw, Inc. produces and sells outdoor equipment. On July 1, 2014, Wishaw, Inc. issued $150,000,000 of 20-year, 12% bonds at a market (effective) interest rate of 9%, receiving cash of $191,403,720. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.

Required:

1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds.

2. Journalize the entries to record the following:

A) The first semiannual interest payment of December 31, 2014, and the amortization of the bond premium, using the INTEREST METHOD. (Round to the nearest dollar)

B) The interest payment on June 30, 2015 and the amortization of the bond premium, using the interest method. (Round to the nearest dollar.)

3. Determine the total interest expense for 2014.

Explanation / Answer

Face Value of the Bond , FV = $150,000,000

Time to Maturity, T = 20 years

Semi-annual bond payment so payment periods, N = 40

Market Interest Rate or YTM , R = 9% p.a.

Coupon Rate of the bond, CR= 12%

Semi-annual coupon payment, C = 150,000,000 *12%/2 = $9,000,000

Premium on the bond issue = 191403720-150000000 = $41,403,720

Premium amortised per period = 41,403,720/40 = $1,035,093

The Bond Premium account is a contra account for the bonds payable account. When the sum of the Bond Payable and Bond Premium account is summed we get the total proceeds from the bond issue, As the premium is amortised by the end of the maturity period the outstanding bond payable is equal to the face value of the bond.

PART 1

Cash received is equivalent to the proceeds from the issue. The bonds outstanding account is credited with the face value of the bonds issued and the bond premium account is credited with the premium received due to issue at premium

PART 2 A

The interest expense is different from the cash interest paid due to bond being issued at premium

The cash is credited with actual coupon payment of $9,000,000. The bond premium amortised per period is determined as earlier $1,035,093. The difference of the interest paid and bond premium is the interest expense.

PART 2 B

At the end of Jun 30 2015,

The cash is credited with actual coupon payment of $9,000,000. The bond premium amortised per period is determined as earlier $1,035,093. The difference of the interest paid and bond premium is the interest expense.

The bond amortization premium account is amortized over the 40 payments periods and by the end of the 40 periods the bonds payable outstanding amount is equivalent to the face value of the bonds payable.

PART 3

The interest expense for 2014 will be the same as that found in PART 2 A

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