Time for a bond payable problem. Since you are really great about creating your

Question

Time for a bond payable problem.

Since you are really great about creating your own problems, how about creating a bond problem? Please provide the following:

i.Date of issuance.

ii.The bond must be issued at a premium.

iii.The bond must have a maturity of at least eight years.

iv.The bond must pay interest semi annual.

v.Determine the principal, stated interest rate, market interest rate, and maturity for your bond.

Required:            

A.Calculate the annuity and the number of periods.

B.Compute the present value for the bond on 07/01/12, either using Excel or the tables at the end of the book.

C.Prepare the journal entry when the bond was issued.

D.Prepare the journal entries for the first interest payment.

E.Determine the amount of expenses that will be reported on the income statement for Year #2

F.Review you journal entries in in D and explain why the amount of cash paid to the bond holders is different from the expense reported on the income statement.

G.Explain why you company needs the additional capital (cash) provided by the bond

Explanation / Answer

As per policy, we are allowed to answer four parts of a question, so answering A - D :

As we have to create the problem figures, so problem structure is:

i.Date of issuance = 07/01/12

ii.The bond must be issued at a premium = 113.55 (based on market yield)

iii.The bond must have a maturity = 10 years.

iv.The bond interest payment = semi annually

v.The principal, stated interest rate, market interest rate, and maturity for your bond= $100,000 at 10% and market rate of interest 8%. The maturity of bond = 07/01/22.

Requirements:

A: Annuity = $100000 * 10% = $5000 for 20 periods of 6 months.

B: Present value = present value halfyear interests + present value of principle repayment on maturity

= 100000 * 10% * 1/2 * PVIFA[ (8/2)%, (10*2) ] + $100000 * PVIF[ (8/2)%, (10*2) ]

= $5000 *13.590 + 100000 * 0.456 = $113550

C: the journal entry when the bond was issued :

Debit Cash $113550

Credit Bond Payable $100000

Credit Premium on Bond Payable $13550

D: the journal entries for the first interest payment :

Debit Interest expense $4542

Debit   Premium on Bond Payable $458

Credit Cash $5000

( Premium amortised = 113550 * 8% - 5000 = 4542 - 5000 = $458)

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