District Water Company issued 10-year bonds with a face value of $100,000 and a
ID: 2484486 • 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:
Explanation / Answer
1)
semiannual interest = $100000 x 8% x (1/2) = $4000
semi-annual yield = 5%
Amount received on issuance of the bonds
= $4000 x PVIFA(5%, 20) + $100000 x PVIF (5%, 20)
= $4000 x 12.462 + $100000 x 0.377
= $87548
2)
In absense of information, it has been assumed that the bond discount has been amortized using straight line method.
Bond discount = $100000 - $87548 = $12452
Semi-annual amortization = $12452 / 20 = $622.60
First interest = $4000
Amortization = $622.60
3)
For issuance of bond
Cash............................................Dr. $87548
Discount on bonds payable............Dr. $12452
Bonds payable................................................Cr. $100000
For first interest payment and amortization
Interest expense...........................Dr. 4622.60
Discount on bonds payable............................Cr.$622.60
Cash............................................................Cr. $4000
4)
Interest expense...........................Dr. 4622.60
Discount on bonds payable............................Cr.$622.60
Cash............................................................Cr. $4000