Houston Co. issues $100 million in bonds on January 1, 2017 to expire in 6 years
ID: 2513144 • Letter: H
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 and the yield are given below. Dallas Inc. purchased $1 million of the bonds (face value). Dallas Inc. classifies the bonds as available for sale.
Stated Coupon Rate= 4.5% Market Yield Rate= 4%
a.) Prepare the amortization table for the $1 million bonds purchased by Dallas Inc.
b.) Prepare the journal entry for purchase of the bonds by Dallas Inc. at the issue price.
c.) Prepare the two journal entries for the receipt of interest revenue by Dallas Inc.
d.) Assuming that the market price of the bonds is 101 on December 31, 2017, prepare the necessary journal for Dallas Inc.
Explanation / Answer
Part a:
Bond value ($)
1000000
Year
Annual interest (1000000 x 4.5%)
Present value factor @4% pa.
Present value cash inflow
1
45000
0.9615385
43269.23077
2
45000
0.9245562
41605.02959
3
45000
0.8889964
40004.83614
4
45000
0.8548042
38466.1886
5
45000
0.8219271
36986.7198
6
45000
0.7903145
35564.15366
Principal
1000000
0.7903145
790314.5257
Value of bond
1026210.684
Part (b):
Date
Account titles and explanations
Debit ($)
Credit ($)
4.5% Bond
1000000
Premium on bond
26210.684
Bank
1026210.684
(Being bond purchased)
Workings:
Year
Annual interest (1000000 x 4.5%)
Present value factor @4% pa.
Present value cash inflow
1
45000
0.961538
43269.23
2
45000
0.924556
41605.03
3
45000
0.888996
40004.84
4
45000
0.854804
38466.19
5
45000
0.821927
36986.72
6
45000
0.790315
35564.15
Principal
1000000
0.790315
790314.5
1026211
Less: Face value of bond
1000000
Premium on bond
26210.68
Part ©
Date
Account titles and explanations
Debit ($)
Credit ($)
Jun-30
Bank {(1000000 x 4.5%) X 6/12}
22500
Interest received
22500
(Being interest received)
Interest received
22500
Profit and loss account
22500
(Being interest credited to profit and loss account)
Dec-31
Bank {(1000000 x 4.5%) X 6/12}
22500
Interest received
22500
(Being interest received)
Interest received
22500
Profit and loss account
22500
(Being interest credited to profit and loss account)
Part (d):
Market value of Bond
1010000
Book value of bond
1000000
Profit on appreciation of investment (1010000 - 1000000)
10000
Part a:
Bond value ($)
1000000
Year
Annual interest (1000000 x 4.5%)
Present value factor @4% pa.
Present value cash inflow
1
45000
0.9615385
43269.23077
2
45000
0.9245562
41605.02959
3
45000
0.8889964
40004.83614
4
45000
0.8548042
38466.1886
5
45000
0.8219271
36986.7198
6
45000
0.7903145
35564.15366
Principal
1000000
0.7903145
790314.5257
Value of bond
1026210.684
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.