Since you are really great about creating your own problems, how about creating
ID: 2566030 • Letter: S
Question
Since you are really great about creating your own problems, how about creating a bond problem? Please provide the following:
i.Date of issuance.
ii.The bond must be issued at a premium.
iii.The bond must have a maturity of at least eight years.
iv.The bond must pay interest semi annual.
v.Determine the principal, stated interest rate, market interest rate, and maturity for your bond.
Required:
A.Calculate the annuity and the number of periods.
B.Compute the present value for the bond on 07/01/12, either using Excel or the tables at the end of the book.
C.Prepare the journal entry when the bond was issued.
D.Prepare the journal entries for the first interest payment.
E.Determine the amount of expenses that will be reported on the income statement for Year #2
F.Review you journal entries in in D and explain why the amount of cash paid to the bond holders is different from the expense reported on the income statement.
G.Explain why you company needs the additional capital (cash) provided by the bond
Explanation / Answer
For Example Consider 8 year 9% $100000 bond issued in an 8% market for $ 105830 on January 1, 2016 Few calculations below: 1 The bond premium of $5830 must be amortized to Interest Expense over the life of the bond. This amortization will cause the bond's book value to decrease from $104,100 on January 1, 2016 to $100,000 just prior to the bond maturing on December 31, 2023 2 The corporation must make an interest payment of $4,500 ($100,000 x 9% x 6/12) on each June 30 and December 31. This means that the Cash account will be credited for $4,500 on each interest payment date 3 The effective interest rate method uses the market interest rate at the time that the bond was issued. In our example, the market interest rate on January 1, 2016 was 4% per semiannual period for 16 semiannual periods. A B C D E F G Date Interest payment 4.5% * FV Interest expense 4%*G Amortization of bond C-B Credit balance of Bond Amortization Credit balance of Bond Payable Book value of Bond F+E Credit Cash Debit Interest Expense Debit Bond Premium Jan 1, 2016 5,830.00 100000 105830 June 30, 2016 4500 4,233.20 -266.80 5,563.20 100000 105563.2 Dec 31, 2016 4500 4,222.53 -277.47 5,285.73 100000 105285.73 June 30,2017 4500 4,211.43 -288.57 4,997.16 100000 104997.16 Dec 31, 2017 4500 4,199.89 -300.11 4,697.04 100000 104697.04 June 30,2018 4500 4,187.88 -312.12 4,384.93 100000 104384.93 Dec 31, 2018 4500 4,175.40 -324.60 4,060.32 100000 104060.32 June 30,2019 4500 4,162.41 -337.59 3,722.74 100000 103722.74 Dec 31, 2019 4500 4,148.91 -351.09 3,371.64 100000 103371.64 June 30,2020 4500 4,134.87 -365.13 3,006.51 100000 103006.51 Dec 31, 2020 4500 4,120.26 -379.74 2,626.77 100000 102626.77 June 30,2021 4500 4,105.07 -394.93 2,231.84 100000 102231.84 Dec 31, 2021 4500 4,089.27 -410.73 1,821.12 100000 101821.12 June 30,2022 4500 4,072.84 -427.16 1,393.96 100000 101393.96 Dec 31, 2022 4500 4,055.76 -444.24 949.72 100000 100949.72 June 30,2023 4500 4,037.99 -462.01 487.71 100000 100487.71 Dec 31, 2023 4500 4,019.51 -487.71 - 100000 100000 A & B Interest payment Annuity Factor Present Value 4500 0.96 4,326.92 4500 0.92 4,160.50 4500 0.89 4,000.48 4500 0.85 3,846.62 4500 0.82 3,698.67 4500 0.79 3,556.42 4500 0.76 3,419.63 4500 0.73 3,288.11 4500 0.70 3,161.64 4500 0.68 3,040.04 4500 0.65 2,923.11 4500 0.62 2,810.69 4500 0.60 2,702.58 4500 0.58 2,598.64 4500 0.56 2,498.69 104500 0.53 55,793.40 105,826.15 C Jan 1, 2016 Cash A/C 105830 To Bonds Payable 100000 To premium on bonds payable 5830 D Interest Expense 4233.2 Premium on Bonds payable 266.8 To Cash A/c 4500