On March 1, 2009, ABC issues 10%, 20-year bonds with a face value of $100 millio

Question

On March 1, 2009, ABC issues 10%, 20-year bonds with a face value of $100 million. Interest is payable semi-annually on June 30 and December 31, and the bond will be repaid on December 31, 2028. The market rate of interest on the date of issue is 8%, compounded semi-annually. The proceeds from the bond issue were $121,348,524.19, including accrued interest, but not taking into account bond issue costs. The company incurred bond issue costs of $600,000 related to the bond issue, paid in cash at the time of issuance.

Required 1. Provide the journal entry to record the bond issuance.

2. Provide journal entries related to interest expense and the amortization of bond issue costs for the entire year ended December 31, 2019 (hint: there are two payment dates during the year that need entries).

3. On April 1, 2020, ABC buys back and retires $30 million of the bonds for $27,530,895.24. Provide all relevant journal entries on April 1, 2020.

4. Provide the journal entry to record interest expense and amortization of bond issue costs on June 30, 2020.

5. What is the balance in the Bonds Payable account as of June 30, 2020? Justify the balance in this account by showing two sets of calculations: a. Use T-accounts to show the remaining balance in bonds payable after all journal entries in questions 3 and 4. b. Do a PV calculation to show that the book value equals the present value of the remaining cash flows associated with the unredeemed portion of the bonds.

Explanation / Answer

1. Journal

2. Journal

3. Journal

4. Journal Entry

2009 March 1 Cash 121348524.19          Bonds Payable 100000000          Premium on bonds payable 21348524.19 March 1 Bond Issuance Cost 600000          Cash 600000

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