2. Bond Payable: On 7/1/14, Sasha issued $ 2,000,000 12% bonds, maturing in 5 ye

Question

2. Bond Payable:

On 7/1/14, Sasha issued $ 2,000,000 12% bonds, maturing in 5 years with a yield of 10%,

compounded semi-annually. The bonds pay interest semi-annually on June 30 and December 31

of each year. The bonds are to be accounted for under the effective interest method. Round to

the nearest dollar.

At what amount were the bonds issued? __________

a. Prepare a well-labeled schedule (with debits/credits shown) for the journal entries through the life of the Bond.

b. Prepare the original Journal Entry to record the issue of the Bond

c. Prepare the Journal Entry to record the 12/31/15 Interest related to the Bond

Explanation / Answer

A-bond amount-2000000

coupon=12%p.a

so for six months=6%

coupon amount=2000000*6/100=120000

effective yield rate semi-annually-10*6/12=5%

Prersent value annuity factor @ 5% =7.721

Present value of coupon payments=120000*7.721=926520

Bond pv=2000000*.613=1226000

Issue price=1226000+926520=2152520

ENTRIES DEBIT CREDIT

BANK 2000000

BOND 2000000(AS ON 7-1-14)

INTEREST 120000

BANK 120000?(JUNE 30'14)

INTEREST 120000

BANK 120000(DEC 31'14)

INTEREST 120000

BANK 120000(JUN 30'15)

INTEREST 120000

BANK 120000(DEC 31'15)

INTEREST 120000

BANK 120000(JUN 30'16)

INTEREST 120000

BANK 120000(DEC 31'16)

INTEREST 120000

BANK 120000(JUN 30'17)

INTEREST 120000

BANK 120000(DEC 31' 17)

INTEREST 120000

BANK 120000(JUN 30' 18)

INTEREST 120000

BANK 120000(DEC 31'18)

BOND 2000000

BANK 2000000(BOND REDEEMED)

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