Houston Co. issues $100 million in bonds on January 1, 2017 to expire in 6 years

Question

Houston Co. issues $100 million in bonds on January 1, 2017 to expire in 6 years. Interest is paid semi-annually on June 30 and December 31. The coupon (stated) rate is 6.5% and the market (yield) rate is 6%. Dallas Inc. purchased $1 million of the bonds (face value). Dallas Inc. classifies the bonds as available for sale.

a) Calculate the price and prepare the amortization table the $100 million bonds issued by Houston Co.

b) Prepare the journal entry at issuance for Houston Co.

c) Prepare the two interest expense entries for 2017 for Houston Co.

d) Prepare the amortization table for the $1 million bonds purchased by Dallas Inc.

e) Prepare the journal entry for purchase of the bonds by Dallas Inc. at the issue price.

f) Prepare the two journal entries for the receipt of interest revenue by Dallas Inc.

g) Assuming that the market price of the bonds is 101 on December 31, 2017, prepare the necessary journal for Dallas Inc.

Explanation / Answer

Solution a:

Face value of bond = $100,000,000

Coupon rate = 6.50%, 3.25% semi annual

Market rate of interest = 6%, 3% semiannual

Period of maturity = 6 years

Issue price of bond = Present value of interest and principal discounted at market interest rate

= ($100,000,000*3.25%)*cumulative PV factor at 3% for 12 periods + $100,000,000 * PV factor at 3% for 12th period

= $3,250,000* 9.954004 + $100,000,000*0.70138

= $102,488,501

Solution b:

Solution c:

Solution d:

Investment amount of dalal Inc. = $102,488,501 / 100 = $1,024,885

Bond Amortization Schedule - Houston Co Period Cash Paid Interest Expense Premium Amortized Carrying Value 1-Jan-17 $102,488,501 30-Jun-17 $3,250,000 $3,074,655 $175,345 $102,313,156 31-Dec-17 $3,250,000 $3,069,395 $180,605 $102,132,551 30-Jun-18 $3,250,000 $3,063,977 $186,023 $101,946,527 31-Dec-18 $3,250,000 $3,058,396 $191,604 $101,754,923 30-Jun-19 $3,250,000 $3,052,648 $197,352 $101,557,571 31-Dec-19 $3,250,000 $3,046,727 $203,273 $101,354,298 30-Jun-20 $3,250,000 $3,040,629 $209,371 $101,144,927 31-Dec-20 $3,250,000 $3,034,348 $215,652 $100,929,275 30-Jun-21 $3,250,000 $3,027,878 $222,122 $100,707,153 31-Dec-21 $3,250,000 $3,021,215 $228,785 $100,478,367 30-Jun-22 $3,250,000 $3,014,351 $235,649 $100,242,718 31-Dec-22 $3,250,000 $3,007,282 $242,718 $100,000,000

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