Answer:
issue $700,000 in 5 year bonds that pay 13% semiannual coupons (coupon = $45,500)
market interest rate 12%, so bonds will be sold at a premium
1) What was the issue price on January 1 of this year?
issue price = present value of face value + present value of interest payments
- present value of face value = $700,000 / (1 + 6%)¹⁰ = $390,876
- present value of annuity = $45,500 x {1 - [1 / (1 + 6%)¹⁰]} / 6% = $334,884
issue price = $390,876 + $334,884 = $725,760
journal entry to record issuance of the bonds:
Dr Cash 725,760
Cr Bonds payable 700,000
Cr Premium on bonds payable 25,760
2) What amount of interest expense should be recorded on June 30 and December 31 of this year?
amortization of bond premium June 30 = ($725,760 x 6%) - ($700,000 x 6.5%) = $43,546 - $45,500 = -$1,954
Journal entry June 30th, first coupon payment:
Dr Interest expense 43,546
Dr Premium on bonds payable 1,954
Cr Cash 45,500
amortization of bond premium December 31 = ($727,714 x 6%) - ($700,000 x 6.5%) = $43,663 - $45,500 = -$1,837
Journal entry December 31st, second coupon payment:
Dr Interest expense 43,663
Dr Premium on bonds payable 1,837
Cr Cash 45,500
3) What amount of cash should be paid to investors June 30 and December 31 of this year?
$45,500 per coupon payment
4) What is the book value of the bonds on June 30 and December 31 of this year?
Book value on June 30th:
Bonds payable $700,000
Premium on bonds payable $23,806
Book value on December 31st:
Bonds payable $700,000
Premium on bonds payable $21,969
