District Water Company issued 10-year bonds with a face value of $100,000 and a
ID: 2425992 • Letter: D
Question
District Water Company issued 10-year bonds with a face value of $100,000 and a stated interest rate of 8.0%. The bonds are dated April 1, 2016, and call for semiannual interest payments on each April 1 and October 1. Due to market fluctuations, the bonds actually sold to yield 10.0% per year. 1. Compute the amount received for the bonds. 2. Compute the first interest and amortization amounts for the October 1, 2016, payment. 3. Prepare journal entries for the issuance of the bonds and for the first interest payment. 4. Compute the second interest and amortization amounts for the April 1, 2017, payment. SOLUTION: District Water Company issued 10-year bonds with a face value of $100,000 and a stated interest rate of 8.0%. The bonds are dated April 1, 2016, and call for semiannual interest payments on each April 1 and October 1. Due to market fluctuations, the bonds actually sold to yield 10.0% per year. 1. Compute the amount received for the bonds. 2. Compute the first interest and amortization amounts for the October 1, 2016, payment. 3. Prepare journal entries for the issuance of the bonds and for the first interest payment. 4. Compute the second interest and amortization amounts for the April 1, 2017, payment. SOLUTION:Explanation / Answer
1. Amount received for the bonds = 4000 x PVIFA5%,20 + 100,000 x PVIF5%,20
or 4,000 x 12.462+ 100,000 x 0.377 = $ 87,548
2. The first interest payment is $ 4,000, interest expense is ( 87,548 x 5%) = 4,377.40, and the amortization of bond discount is (4,377.40 - 4,000) = $ 377.40 ( Applying the effective rate method)
3. Journal entries:
4. On April 1, 2017: Carrying value of bonds payable is 87,548 + 377.40 = $ 87,925.40
Therefore semiannual interest expense = 87,925.40 x 5% = $ 4,396.27. Amount of interest payment will be $ 4,000, and the amount of amortization of bond discount will be $ 396.27
Date Account Titles Debit Credit $ $ April 1, 2016 Cash 87,548 Discount on bonds payable 12,452 Bonds payable 100,000 To record issue of 8% bonds at a discount October 1, 2016 Interest expense 4,377.40 Discount on bonds payable 377.40 Cash 4,000 To record semiannual interest payment and amortization of discount on bonds payable