On June 30,2014, the market interest rate is 3%, Garden Groceries Ltd. issues $1
ID: 2480225 • Letter: O
Question
On June 30,2014, the market interest rate is 3%, Garden Groceries Ltd. issues $1600000 of 4%, 15 years bonds. The bonds pay interest on June 30 and December 31. Garden Groceries Ltd. amortizes bond premium by the effective-interest method. a. use the pv function in excel to calculate the issue price of the bonds b. prepare a bond amortization table for the term of the bonds c. record the issuance of bonds payable on june 30,2014, the payment of interest on december 31, 2014, and the payment of interest on june 30, 2015
Explanation / Answer
Solution:
Par Value of the Bonds issued = $1,600,000
Coupon Rate = 4% annual or 2% semi annual
Coupon Interest Amount to be paid on each interest payment date = $1,600,000 x 2% = $32,000
a. Calculation of Issue Price of the bonds
Market Interest Rate (R) = 3% annual or 1.5% semi annual
Number of Interest Payments = 15 years 2 = 30
Issue Price of the bonds = Coupon Payment x PVIFA (1.5%, 30) + Par Value x PVIF (1.5%, 30)
= ($32,000 x 24.0158380037) + ($1,600,000 x 0.6397624298)
= $768,507 + $1,023,620
= $1,792,126
Since, Issue price is higher than the par value, bonds are issued at premium.
b. bond amortization table for the term of the bonds
Premium on Bonds Payable = Issue Price - Par Value = $1,792,126 - $1,600,000 = $192,126
Premium on Bonds Payable is amortized over the life of Bonds using effective interest method.
Market Interest Rate = 3% per annum or 1.5% semiannual
Amortization Schedule for Premium on Bonds Payable for the term of the bond
Payment intervals
Date
Bond Interest Payable (Par Value of the bonds x Coupon Rate semiannual)
Bond Interest Expenses (Beginning Book Value @ 1.5% semiannual Market Interest Rate)
Amount of Bond Premium to be Amortized with each interest payment (Interest Payable - Interest Expenses)
Balance of Unamortized Premium on Bonds Payable
Par Value of Bonds Payable
Book Value (Par Value + Balance of Unamortized Bond Premium)
0
June 30, 2014
$192,126
$1,600,000
$1,792,126
1
Dec 31, 2014
$32,000
$26,882
$5,118
$187,008
$1,600,000
$1,787,008
2
June 30, 2015
$32,000
$26,805
$5,195
$181,813
$1,600,000
$1,781,813
3
Dec 31, 2015
$32,000
$26,727
$5,273
$176,540
$1,600,000
$1,776,540
4
June 30, 2016
$32,000
$26,648
$5,352
$171,188
$1,600,000
$1,771,188
5
Dec 31, 2016
$32,000
$26,568
$5,432
$165,756
$1,600,000
$1,765,756
6
June 30, 2017
$32,000
$26,486
$5,514
$160,242
$1,600,000
$1,760,242
7
Dec 31, 2017
$32,000
$26,404
$5,596
$154,646
$1,600,000
$1,754,646
8
June 30, 2018
$32,000
$26,320
$5,680
$148,966
$1,600,000
$1,748,966
9
Dec 31, 2018
$32,000
$26,234
$5,766
$143,200
$1,600,000
$1,743,200
10
June 30, 2019
$32,000
$26,148
$5,852
$137,348
$1,600,000
$1,737,348
11
Dec 31, 2019
$32,000
$26,060
$5,940
$131,409
$1,600,000
$1,731,409
12
June 30, 2020
$32,000
$25,971
$6,029
$125,380
$1,600,000
$1,725,380
13
Dec 31, 2020
$32,000
$25,881
$6,119
$119,260
$1,600,000
$1,719,260
14
June 30, 2021
$32,000
$25,789
$6,211
$113,049
$1,600,000
$1,713,049
15
Dec 31, 2021
$32,000
$25,696
$6,304
$106,745
$1,600,000
$1,706,745
16
June 30, 2022
$32,000
$25,601
$6,399
$100,346
$1,600,000
$1,700,346
17
Dec 31, 2022
$32,000
$25,505
$6,495
$93,851
$1,600,000
$1,693,851
18
June 30, 2023
$32,000
$25,408
$6,592
$87,259
$1,600,000
$1,687,259
19
Dec 31, 2023
$32,000
$25,309
$6,691
$80,568
$1,600,000
$1,680,568
20
June 30, 2024
$32,000
$25,209
$6,791
$73,777
$1,600,000
$1,673,777
21
Dec 31, 2024
$32,000
$25,107
$6,893
$66,883
$1,600,000
$1,666,883
22
June 30, 2025
$32,000
$25,003
$6,997
$59,886
$1,600,000
$1,659,886
23
Dec 31, 2025
$32,000
$24,898
$7,102
$52,785
$1,600,000
$1,652,785
24
June 30, 2026
$32,000
$24,792
$7,208
$45,576
$1,600,000
$1,645,576
25
Dec 31, 2026
$32,000
$24,684
$7,316
$38,260
$1,600,000
$1,638,260
26
June 30, 2027
$32,000
$24,574
$7,426
$30,834
$1,600,000
$1,630,834
27
Dec 31, 2027
$32,000
$24,463
$7,537
$23,297
$1,600,000
$1,623,297
28
June 30, 2028
$32,000
$24,349
$7,651
$15,646
$1,600,000
$1,615,646
29
Dec 31, 2028
$32,000
$24,235
$7,765
$7,881
$1,600,000
$1,607,881
30
June 30, 2029
$32,000
$24,118
$7,882
($1)
$1,600,000
$1,599,999
Total:
$960,000
$767,873
$192,127
c. record the issuance of bonds payable on june 30,2014, the payment of interest on december 31, 2014, and the payment of interest on june 30, 2015
Date
Account Title and Explanation
Debit
Credit
June 30, 2014
Cash A/c Dr.
$1,792,126
To Premium on Bonds Payable
$192,126
To Bonds Payable
$1,600,000
(Being the bonds issued at premium)
Dec 31, 2014
Interest Expenses Dr.
$26,882
Premium on Bonds Payable Dr.
$5,118
To Interest Payable to Bond Holders
$32,000
(being Interest expenses recorded)
On payment of Interest
Dec 31, 2014
Interest Payable to Bond Holders Dr.
$32,000
To Cash A/c
$32,000
(Being interest paid)
June 30, 2015
Interest Expenses Dr.
$26,805
Premium on Bonds Payable Dr.
$5,195
To Interest Payable to Bond Holders
$32,000
(being Interest expenses recorded)
On payment of Interest
June 30, 2015
Interest Payable to Bond Holders Dr.
$32,000
To Cash A/c
$32,000
(Being interest paid)
Payment intervals
Date
Bond Interest Payable (Par Value of the bonds x Coupon Rate semiannual)
Bond Interest Expenses (Beginning Book Value @ 1.5% semiannual Market Interest Rate)
Amount of Bond Premium to be Amortized with each interest payment (Interest Payable - Interest Expenses)
Balance of Unamortized Premium on Bonds Payable
Par Value of Bonds Payable
Book Value (Par Value + Balance of Unamortized Bond Premium)
0
June 30, 2014
$192,126
$1,600,000
$1,792,126
1
Dec 31, 2014
$32,000
$26,882
$5,118
$187,008
$1,600,000
$1,787,008
2
June 30, 2015
$32,000
$26,805
$5,195
$181,813
$1,600,000
$1,781,813
3
Dec 31, 2015
$32,000
$26,727
$5,273
$176,540
$1,600,000
$1,776,540
4
June 30, 2016
$32,000
$26,648
$5,352
$171,188
$1,600,000
$1,771,188
5
Dec 31, 2016
$32,000
$26,568
$5,432
$165,756
$1,600,000
$1,765,756
6
June 30, 2017
$32,000
$26,486
$5,514
$160,242
$1,600,000
$1,760,242
7
Dec 31, 2017
$32,000
$26,404
$5,596
$154,646
$1,600,000
$1,754,646
8
June 30, 2018
$32,000
$26,320
$5,680
$148,966
$1,600,000
$1,748,966
9
Dec 31, 2018
$32,000
$26,234
$5,766
$143,200
$1,600,000
$1,743,200
10
June 30, 2019
$32,000
$26,148
$5,852
$137,348
$1,600,000
$1,737,348
11
Dec 31, 2019
$32,000
$26,060
$5,940
$131,409
$1,600,000
$1,731,409
12
June 30, 2020
$32,000
$25,971
$6,029
$125,380
$1,600,000
$1,725,380
13
Dec 31, 2020
$32,000
$25,881
$6,119
$119,260
$1,600,000
$1,719,260
14
June 30, 2021
$32,000
$25,789
$6,211
$113,049
$1,600,000
$1,713,049
15
Dec 31, 2021
$32,000
$25,696
$6,304
$106,745
$1,600,000
$1,706,745
16
June 30, 2022
$32,000
$25,601
$6,399
$100,346
$1,600,000
$1,700,346
17
Dec 31, 2022
$32,000
$25,505
$6,495
$93,851
$1,600,000
$1,693,851
18
June 30, 2023
$32,000
$25,408
$6,592
$87,259
$1,600,000
$1,687,259
19
Dec 31, 2023
$32,000
$25,309
$6,691
$80,568
$1,600,000
$1,680,568
20
June 30, 2024
$32,000
$25,209
$6,791
$73,777
$1,600,000
$1,673,777
21
Dec 31, 2024
$32,000
$25,107
$6,893
$66,883
$1,600,000
$1,666,883
22
June 30, 2025
$32,000
$25,003
$6,997
$59,886
$1,600,000
$1,659,886
23
Dec 31, 2025
$32,000
$24,898
$7,102
$52,785
$1,600,000
$1,652,785
24
June 30, 2026
$32,000
$24,792
$7,208
$45,576
$1,600,000
$1,645,576
25
Dec 31, 2026
$32,000
$24,684
$7,316
$38,260
$1,600,000
$1,638,260
26
June 30, 2027
$32,000
$24,574
$7,426
$30,834
$1,600,000
$1,630,834
27
Dec 31, 2027
$32,000
$24,463
$7,537
$23,297
$1,600,000
$1,623,297
28
June 30, 2028
$32,000
$24,349
$7,651
$15,646
$1,600,000
$1,615,646
29
Dec 31, 2028
$32,000
$24,235
$7,765
$7,881
$1,600,000
$1,607,881
30
June 30, 2029
$32,000
$24,118
$7,882
($1)
$1,600,000
$1,599,999
Total:
$960,000
$767,873
$192,127
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