AP10-8 (Amount of bond issuance and journal entries at various yields) Can-Ed Un
ID: 2397123 • Letter: A
Question
AP10-8 (Amount of bond issuance and journal entries at various yields) Can-Ed University, which is owned by a group of Canadian universities and colleges, issued bonds to finance the construction of an overseas carnpus in China. Can-Ed issued 6% 20-year bonds with a face value of $100 million. The bonds will pay interest semi-annually Required a. Calculate the amount of cash Can-Ed will receive if the bonds are sold at a yield rate of i, 6% (issued at par) ii. 6.5% (issued at 94.448) iii. 5.5% (issued at 106.02) b. Prepare the journal entry Can-Ed would record at the time of the issuance of the bonds under each of the alternative yields. Also prepare the journal entries to record the interest expense for the first two periods under each alternative.
Explanation / Answer
Answer a-1. Table Value Based on n= 40 (20 Years X 2 ) i= 3.00% (6% / 2) Cash Flow Amount Present Value Interest - $100 X 6% X 6/12 3 69.34 ($3 X 23.1148) Principal 100 30.66 ($100 X 0.3066) Issue Price of Bonds 100.00 Discount on issue of Bonds (0.00) Answer a-2. Table Value Based on n= 40 (20 Years X 2 ) i= 3.25% (6.50% / 2) Cash Flow Amount Present Value Interest - $100 X 6% X 6/12 3 66.625 ($3 X 22.20843) Principal 100 27.823 ($100 X 0.27823) Issue Price of Bonds 94.448 Discount on issue of Bonds 5.552 Answer a-3. Table Value Based on n= 40 (20 Years X 2 ) i= 2.75% (5.50% / 2) Cash Flow Amount Present Value Interest - $100 X 6% X 6/12 3 72.23 ($3 X 24.07810) Principal 100 33.79 ($100 X 0.33785) Issue Price of Bonds 106.02 Premium on issue of Bonds 6.02 Answer b-1. Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1 Cash 100.000 Bonds Payable 100.000 (To record the issue of Bonds) 2 Interest Expense 3.000 Cash 3.000 (To record the interest paid) 3 Interest Expense 3.000 Cash 3.000 (To record the interest paid) Answer b-2. Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1 Cash 94.448 Discount on Issue of Bonds 5.552 Bonds Payable 100.000 (To record the issue of Bonds) 2 Interest Expense 3.070 Cash 3.000 Discount on Issue of Bonds 0.070 (To record the interest paid) 3 Interest Expense 3.072 Cash 3.000 Discount on Issue of Bonds 0.072 (To record the interest paid) Bond Discount Amortization Schedule Date Interest Paid - $100 X 6% X 6/12 Interest Expense - Preceeding Bond Carrying Value X 6.50% X 6/12 Discount Amortization Unamortized Discount Bonds Carrying Amount A B C = B-A D = D - C E = $100 - D 0 - - - 5.552 94.448 1 3.000 3.070 0.070 5.482 94.518 2 3.000 3.072 0.072 5.410 94.590 Answer b-3. Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1 Cash 106.020 Premium on Issue of Bonds 6.020 Bonds Payable 100.000 (To record the issue of Bonds) 2 Interest Expense 2.916 Premium on Issue of Bonds 0.084 Cash 3.000 (To record the interest paid) 3 Interest Expense 2.913 Premium on Issue of Bonds 0.087 Cash 3.000 (To record the interest paid) Premium Amortization Schedule Date Interest Paid - $100 6% X 6/12 Interest Expense - Preceeding Bond Carrying Value X 5.50% X 6/12 Premium Amortization Unamortized Premium Bonds Carrying Amount A B C = A - B D = D - C E = $100 + D 0 - - - 6.020 106.020 1 3.000 2.916 0.084 5.935 105.935 2 3.000 2.913 0.087 5.848 105.848