Mazeltov Corporation issued $100,000 3-year. 10% stated rate bonds on January 1,

Question

Mazeltov Corporation issued $100,000 3-year. 10% stated rate bonds on January 1, 2004. The bonds pay interest semi-annually and were sold when the market rate was 8% Calculate the issue price of the bonds. Prepare an amortization schedule for the bonds (use the table below): Payment Date Carrying Value, beginning Cash Interest Interest Expense Amortization Carrying Value, ending 6/30/04 12/31/04 6/30/05 12/31/05 6/30/06 12/31/06 Record the interest expense entry for the 6/30/05 interest payment Accounts Debits Credits.

Explanation / Answer

a) computation of bond price ,

formula for bond price = coupon payments * {1-(1/(1+i)n / i }+ face value / (1+i)n

here,

C = Coupon payment = 100,000 * 10% = 10,000 * 6 / 12 semi-annual = 5,000

I = semiannual yields = required return 10% for year, for semiannual 10 * 6/12 = 5%
n =Number of Coupon Payments = two coupon payments will be made each year for 3 years, we will have a total of 6 coupon payments.
M = Face value = 100,000

Therefore, Bond price = 5000 * {1-(1/(1+5%)6 / 5% }+ 100,000 / (1+5%)6

= 5000 * {1-(1/1.2 / 5% }+ 100,000 / 1.2

=22,000 + 83,242 = $105,242

B) computation of amortization schedule:

c) journal entry for interest expenses on 6/30/2005:

Payment date Carrying value
beginning Cash interest = 100,000*5% Interest expenses = carrying value * market interest 4% semi annual Amortization Carrying value ending 06/30/2004 105,242 5,000 4,210 790 104,452 12/31/2004 104,452 5,000 4,178 822 103,630 06/30/2005 103,630 5,000 4,145 855 102,775 12/31/2005 102,775 5,000 4,111 889 101,886 06/30/2006 101,886 5,000 4,075 925 100,961 12/31/2005 100,961 5,000 4,038 961 100,000

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