3) A ssume Livingston Company issues 10-year bonds, as follows: Bonds are dated

Question

3) A ssume Livingston Company issues 10-year bonds, as follows: Bonds are dated to be issued on: Bonds are issued on: Par value of bonds: Stated annual interest rate Effective annual interest rate: Semiannual interest payments Amortization method used: May 1, 20x6 May 1, 20x6 $600,000 6% 5% May 1 and November 1 Effective Interest Method Prepare and attach an EXCEL schedule to support your answers. REQUIRED a) What total amount will the Livingston Company receive on May 1, 20x6? ended December 31, 20x6? ended December 31, 20x8? on November 1, 20x10. b) What amount of interest expense will be reported on the income statement for the year c) What amount of interest expense will be reported on the income statement for the year d) Assume that the entire bond issue (600,000) is reacquired by Livingston Company 1.03 $ The reacquisition price is: Prepare the appropriate journal entry to record the early retirement of the bonds

Explanation / Answer

Bond Amortisation Schedule a) Computation of Total Amount Receive on Bond Issue on May1 2006 Period Semi Annual Payment Interest Expense @2.5% Amortisation of Bond Value Carrying Value of Bond Par Value of Bond $600,000.00 May-06 $646,782 Coupon Interest Rate P.a. 6% Nov-06 $18,000 $16,170 $1,830 $644,952 Market Effective Interest Rate p.a. 5% Dec-06 $5,375 $644,952 Semiannual Market Interets   2.50% May-07 18000 $10,749 $7,251 $637,701 Annual Interest $36,000.00 Nov-07 $18,000 $15,943 $2,057 $635,643 Semiannual Interets $18,000.00 Dec-07 $5,297 $635,643 Maturity in 10 Year May-08 $18,000 $10,594 $7,406 $628,237 Period (10*2) 20 Nov-08 $18,000 $15,706 $2,294 $625,943 Cumm PVAF @2.5% for 20 15.589 Dec-08 $5,216 $625,943 Present Value of Interest Payment (a) $280,602.00 May-09 18000 $15,649 $2,351 $623,592 Present Value of Bond Par Value (b) 366180 Nov-09 $18,000 $15,590 $2,410 $621,182 ($600000*0.6103) May-10 $18,000 $15,530 $2,470 $618,711 Present Value of Bond (a+b) $646,782.00 Nov-10 $18,000 $15,468 $2,532 $616,179 Hence $646782receive on issue of bond b) Annual Interest for the Year 2006 $21,545.00 ($16170+$5375) c) Annual Interest for the Year 2008 $31,516.00 ($10594+$15706+ $5216) D) Journal Entry to Record early retire of Bond Debit Credit Bond Payable A/c $600,000 Premium on Bond $16,179 Loss on retirement of Bond $1,821 To Cash $618,000 Working note for Early Retirement Bond Face value of Bond $600,000 Caryying Value of Bond on 1 Nov 2010 $616,179 Unamortised Premium $16,179 Reddem Value of Bond ($600000*1.03) $618,000

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