Question

On January 1 st 2012, Everhart Corporation, a calendar year company issues $100,000, 5%, 5-year bonds dated January 1, 2012. The bond pays interest semiannually on January 1 and July 1 . The bonds are issued to yield 6%. 2.50% 3.00% 5.00% 6.00% Present value of a single sum for 5 periods 0.88385 0.86261 0.78353 0.74726 Present value of a single sum for 10 periods 0.78120 0.74409 0.61391 0.55839 Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236 Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009 If Everhart Corporation uses the effective interest method to amortize any premiums or discounts on their
outstanding bonds, what will be the journal entries to record interest expense for calendar year 2013?

Answer 1

Answer:

Interest expense 2894.7 debit

discount on Bonds Payable 394.7 credit

cash 2500 credit

Interest expense 2906.55 debit

discount on Bonds Payable 406.55 credit

interest payable  2500 credit

Explanation:

We have to solve for the 2013 year which is one year after the issuance ofthe bonds.

We solve for the bond issuance price and then, we construct the bonds schedule and take the numbers from period 3 and 4.

Issuance proceeds: present value fo the coupon payment and maturity at market rate:

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C 2,500.000

time 10

rate 0.03

$2500 \times \frac{1-(1+0.03)^{-10} }{0.03} = PV$

PV $21,325.5071

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity   100,000.00

time   10.00

rate  0.03

$\frac{100000}{(1 + 0.03)^{10} } = PV$  

PV   74,409.39

PV c $21,325.5071

PV m  $74,409.3915

Total $95,734.8986

Now we will calcautlethe interest expense by multiplying carrying value by the market value and sutract from the cash outlay to determinate the amortization on the bonds.