On January 1st 2017, the ACME Company issued (sold) $1,000,000 10% 12 year semi-
ID: 2579167 • Letter: O
Question
On January 1st 2017, the ACME Company issued (sold) $1,000,000 10% 12 year semi-annual bonds when the market rate of interest was 8%. These bonds pay interest semiannually on July 1 and January 1. pa rt a:make the journal entry ACME makes when it sold the bonds part b: make the journal entry ACME makes when it makes the first interest payment on 7/1/17 part c: make the journal entry ACME makes on December 31, 2017 connected with these bonds part d: fill in the table value carry value of debt interest exp new carry value of debt 0 payment 1/1/2017 7/1/2017 1/1/2018 7/1/2018 1/1/2019 On 1/1/2019 ACME retired the bonds at 101. Make the necessary journal entry for the retirement of the bonds. part e:Explanation / Answer
Market Interest rate = 8% semiannually
Coupon rate = 10% semi annually
Hence the bond is issued in premium
Present value of principal
=1,000,000 x Present value factor for a single payment (4%, 24 periods)
= 1,000,000 x 0.3901
=390,100
Present value of interest payments
= Interest payment each semiannual period
x Present value factor for an ordinary annuity (4%, 24 periods)
= (1,000,000 x 5%) x 15.2470
= 762,350
Price of bonds
= Present value of principal + Present value of interest payments
= 390,100 + 762,350
= 1,152,450
The bonds will be sold at a $152,450 premium over the face amount.
($1,152,450 - $1,000,000 = $152,450)
Part a : To record sold the bonds
Debit
Credit
Jan 1
Cash
1,152,450
Bonds Payable
1,000,000
Premium on Bond Payable
152,450
Part b : To record semiannual first interest payment
Debit
Credit
Jul 1
Bond Interest Expense ($1,000,000 x 10% x 6 months / 12 months) – Premium 6352
43,648
Premium on Bonds Payable ($152,450 premium / 24 interest payments)
6,352
Cash
50,000
Part c : To record accrued interest.
Debit
Credit
Dec 31
Bond Interest Expense
50,000
Interest Payable (or Bond Interest Payable)
50,000
Part d :
Part e:
Debit
Credit
Jan 1, 2019
Bonds Payable
1,010,000
Cash
1,010,000
Debit
Credit
Jan 1
Cash
1,152,450
Bonds Payable
1,000,000
Premium on Bond Payable
152,450