Question

AP10-8A (Amount of bond issuance, journal entries, and carrying value) Frank Suit Ltd. designs and manufactures anti-gravity suits used by air force pilots and astronauts for space travel. To finance the expansion of its manufacturing operations, the company, in consultation with an investment bank, decided to issue bonds. On August 1, it issued 10-year, semi-annual bonds with a face value of $125 million. The contract rate on the bonds was 12% and the proceeds on the issuance of the bonds were $118.112,500 to yield 13.0%. Interest payments are to be made each January 31 and July 31. Required a. Determine the price of the bonds on issuance and prepare the journal entry to record the bonds' sale on August 1. b. Provide the journal entries to record the first two interest payments. Ignore year- end accruals of interest. c. What amount will be reported for the bond liability on the company's statement of financial position at December 31 of the first year?

Answer 1

a) The price of bonds on issuance is equal to sum of present value of semi annual interest payments and present value of face value of bonds at the end of bond life.

Semi annual interest = Face Value*Interest rate*6/12

= 125,000,000*12%*6/12 = $7,500,000

Relevant interest rate to be used for discounting = 13%*6/12 = 6.5%

No. of semi annual periods for discounting = 10 years*2 periods in a year = 20 periods

Present Value of Interest Payments = Interest Amount*PVAF(6.5%, 20)

= $7,500,000*11.01850725 = $82,638,804

Present Value of Redemption Amount = Face Value*PVF(6.5%, 20)

= $125,000,000*0.283797029 = $35,474,629

Price of Bonds on Issuance = $82,638,804+$35,474,629

= $118,113,433

Therefore price of bonds on issuance is $118,113,433.

Journal Entry to record Issuance (Amounts in $)

Date	Account Titles and Explanations	Debit	Credit
Aug 1	Cash	118,112,500
	Discount on Bonds Payable (125,000,000-118,112,500)	6,887,500
	Bonds Payable		125,000,000
	(To record the issue of bonds)

b) Journal Entries to record interest (Amounts in $)

Date	Account Titles and Explanations	Debit	Credit
Jan 31	Interest Expense (118,112,500*6.5%)	7,677,313
	Discount on Bonds Payable (7,677,313-7,500,000)		177,313
	Cash (125,000,000*6%)		7,500,000
	(To record the first interest payment)
July 31	Interest Expense [(118,112,500+177,313)*6.5%]	7,688,838
	Discount on Bonds Payable (7,688,838-7,500,000)		188,838
	Cash (125,000,000*6%)		7,500,000
	(To record the second interest payment)

c) Bonds Payable = $125,000,000

Unamortized Discount on Bonds Payable = $6,887,500

Amount of bonds liability to be reported on Dec 31 = Bonds payable-Unamortized Discount on bonds

= $125,000,000 - $6,887,500 = $118,112,500.

Therefore $118,112,500 will be reported for the bond liability on the company's statement of financial position at Dec 31 of the first year.