On January 1, 2018, Baruch& Co. issues convertible bonds with a maturity of 5 ye

Question

On January 1, 2018, Baruch& Co. issues convertible bonds with a maturity of 5 years. The par value of the bonds is $400,000, the coupon rate is 6%, and the compounding period is semi-annual with interest paid on June 30" and December 31". The market prices these bonds using an interest rate (effective rate) of 4% c annually.E senni 1. Prepare a journal entry for the issuance on January 1, 2018. (5 points) 2. The effective rate on June 30, 2018 is 6% compounded semi-annually. Prepare a journal entry for the interest payment on June 30, 2018(5 points)

Explanation / Answer

1) if the interest is paid semi-annually, then interest rates gets half and period gets double Issue price = 400000*3% * PVIFA(2%,10) + 400000 * PVIF(2%,10) = 12000 *8.9826 + 400000*0.8203 = 435911 Journal Entry Jan 1 2018: Debit Cash 435911 Credit Bond payable 400000 Credit Premium on Bond payable 35911 2) Journal entry on June 30, 2018: Debit Interest Expense 10923 Debit Premium on Bond payable 1077 Credit Cash 12000 (435911*3%-12000=-1077) 3) Issue price = 400000*3% * PVIFA(6%,8) + 400000 * PVIF(6%,8) = 12000 *6.2098 + 400000*0.6274 = 325478 Journal Entryon Dec 31 2018: Debit Bond Payable 110433 Credit Unrealised Gain 110433 (decrease in value) 4) Issue price = 400000*3% * PVIFA(2%,6) + 400000 * PVIF(2%,6) = 12000 *5.6014 + 400000*0.8880 = 422417 Journal Entry on Dec 31 2019: Debit Unrealised Gain 96939 Credit Bonds Payable 96939 (increase in value)

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