ZuZume Inc issued 3 year $ 200,000 bonds paying 4% interest on January 1, 2015.
ID: 2566450 • Letter: Z
Question
ZuZume Inc issued 3 year $ 200,000 bonds paying 4% interest on January 1, 2015. The bonds pay interest on June 30 and December 31. Part I: At the time of issue, the market rate of interest was 5%. 1. What was the issue price of the bonds? 2. Provide journal entries for: a. the issue of the bonds b. the interest payment on June 30, 2016 and December 31, 2016 3. What is the total interest expense on the bond issue? 4. What is the effect (impact) of the interest expense on the income statement in 2016 if the tax rate is 25%? Part II: ZuZume Inc issued 3 year $ 200,000 bonds paying 6% interest on January 1, 2015. The bonds pay interest on June 30 and December 31. At the time of issue, the market rate of interest was 5%. 1. What was the issue price of the bonds? 2. Provide journal entries for: a. the issue of the bonds b. the interest payment on June 30, 2016 and December 31, 2016 3. What is the total interest expense on the bond issue? 4. What is the effect (impact) of the interest expense on the income statement in 2016 if the tax rate is 25%? You can use the time value of money charts to do this. ZuZume Inc issued 3 year $ 200,000 bonds paying 4% interest on January 1, 2015. The bonds pay interest on June 30 and December 31. Part I: At the time of issue, the market rate of interest was 5%. 1. What was the issue price of the bonds? 2. Provide journal entries for: a. the issue of the bonds b. the interest payment on June 30, 2016 and December 31, 2016 3. What is the total interest expense on the bond issue? 4. What is the effect (impact) of the interest expense on the income statement in 2016 if the tax rate is 25%? Part II: ZuZume Inc issued 3 year $ 200,000 bonds paying 6% interest on January 1, 2015. The bonds pay interest on June 30 and December 31. At the time of issue, the market rate of interest was 5%. 1. What was the issue price of the bonds? 2. Provide journal entries for: a. the issue of the bonds b. the interest payment on June 30, 2016 and December 31, 2016 3. What is the total interest expense on the bond issue? 4. What is the effect (impact) of the interest expense on the income statement in 2016 if the tax rate is 25%? You can use the time value of money charts to do this. ZuZume Inc issued 3 year $ 200,000 bonds paying 4% interest on January 1, 2015. The bonds pay interest on June 30 and December 31. Part I: At the time of issue, the market rate of interest was 5%. 1. What was the issue price of the bonds? 2. Provide journal entries for: a. the issue of the bonds b. the interest payment on June 30, 2016 and December 31, 2016 3. What is the total interest expense on the bond issue? 4. What is the effect (impact) of the interest expense on the income statement in 2016 if the tax rate is 25%? Part II: ZuZume Inc issued 3 year $ 200,000 bonds paying 6% interest on January 1, 2015. The bonds pay interest on June 30 and December 31. At the time of issue, the market rate of interest was 5%. 1. What was the issue price of the bonds? 2. Provide journal entries for: a. the issue of the bonds b. the interest payment on June 30, 2016 and December 31, 2016 3. What is the total interest expense on the bond issue? 4. What is the effect (impact) of the interest expense on the income statement in 2016 if the tax rate is 25%? You can use the time value of money charts to do this.Explanation / Answer
1.
Part I
From the above formula
issue price = 4% x 200,000 x ((1-(1+0.05)^-5)/0.05) + (200,000/(1+0.05)^5)
=8,000 x 2.7232 + 172,767.51 = 21,785.6+172767.51 = 194,553.
2. a. Issue of bonds
b. Interest on June 30, 2016 and December 31, 2016
Discount on bonds payable is to be amortized over the term of the bond, i.e., 3 years.
Amortization for each year will be 5,447 / 3 = $1,816. This means at the time of interest payment each year (June30 and Dec.31) we shall make entry to recover $908 .
3. The total interest expense on the bond issue :
Cash payment =$200,000 x 4% x 3 = $24,000
Amortization of discount =$ 5,447
Total interest expense =$29,447
Part I
From the above formula
issue price = 6% x 200,000 x ((1-(1+0.05)^-3)/0.05) + (200,000/(1+0.05)^3)
=12,000 x 2.7232 + 172,767.51 = 32,678.40+172767.51 = 205,446.
2. a. Issue of bonds
b. Interest on June 30, 2016 and December 31, 2016
Premium on bonds payable is to be amortized over the term of the bond, i.e., 3 years.
Amortization for each year will be 5,446 / 3 = $908. This means at the time of interest payment each year (June30 and Dec.31) we shall make entry to recover $454 .
3. The total interest expense on the bond issue :
Cash payment =$200,000 x 6% x 3 = $36,000
Less: Amortization of Premium =$ 5,446
Total interest expense =$30,554
1-(1+market rate)^-n Bond value Price of bond = Coupon rate X bond value X + market rate (1+market rate)^n PartIRelated Questions
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