Standard Atlantic Shipping issued $5,000,000, face amount, of 7% bonds on Januar

Question

Standard Atlantic Shipping issued $5,000,000, face amount, of 7% bonds on January 1, 20X3. The bonds are 5-year bonds, and Interest is payable every 6 months. At the time of issue, the market rate of interest was only 6%, so the bonds were issued at a premium.

a. Prepare calculations showing that issue price was approximately $5,213,235.

b. Use the effective-interest method of amortization, and prepare the journal entries that Standard Atlantic Shipping would record on January 1, 20X3, June 30, 20X3, and December 31, 20X3.

c. Show how the bonds would appear on Standard Atlantic Shipping's December 31, 20X3 balance sheet.

   

Explanation / Answer

(a)

Semi-annual market rate of interest = 6% x (6/12) = 3%

Number of interest periods = 2 x 5 = 10

Issue price ($) = Present value (PV) of all future interest payments + PV of redemption value (face value)

= 5,000,000 x 7% x (6/12) x PVIFA(3%, 10) + 5,000,000 x PVIF(3%, 10)

= 175,000 x 8.5302 + 5,000,000 x 0.7441

= 1,492,785 + 3,720,500

= 5,213,235

(b) Premium = $(5,213,235 - 5,000,000) = $213,235

Amortization schedule as follows:

Journal entries:

(i) Jan 1, 20X3

DR Cash $5,213,235

        Bonds payable                    $5,000,000

        Premium on bonds payable $213,235

(To record issue of bonds at a premium)

(ii) June 30, 20X3

DR Interest expense on bonds $156,397

DR Premium on bonds payable $18,603

         Cash                                  $175,000

(To record interest expense including amortization of bond premium)

(iii) Dec 31, 20X3

DR Interest expense on bonds $155,839

DR Premium on bonds payable $19,161

         Cash                                  $175,000

(To record interest expense including amortization of bond premium)

(c) As at Dec 31, 20X3:

Bonds payable                                                          $5,175,471

Less: Accummulated amortization on Bonds payable   $175,471

Bonds payable (net)                                                   $5,000,000

Date Interest payment @3.5% x Face Value Interest expense @3% of Book Value Amortization of Premium Balance in Bond Premium Bond Payable Book Value of Bond (A) (B) (C) = (B) - (A) (D) (E) (F) = (D) + (E) Jan 1, 20X3 2,13,235 50,00,000 52,13,235 June 30,20X3 1,75,000 1,56,397 -18,603 1,94,632 50,00,000 51,94,632 Dec 31, 20X3 1,75,000 1,55,839 -19,161 1,75,471 50,00,000 51,75,471

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