Question

Hatch Fly-fishing Company issued $600,000 face value bonds on January 1, 2019, with semiannual interest payments to be made on June 30 and December 31 at a contract rate of 8%. The bonds are scheduled to mature five years after they were issued. The market rate of interest at issuance was 10%. Required: Part 1 Calculate the issue price of the bonds on January 1, 2019. Use Excel formulas. Part 2 Prepare an Effective interest schedule showing the bond interest expense and amounts of amortization for the life of the bonds. Part 3 Prepare journal entries for the following dates: 1) January 1, 2019 (issuance of the bond) 2) June 30, 2019 (first interest payment) 3) December 31, 2023 (last interest payment and repayment of the bond). Part 1 Calculate the issue price

Answer 1

Face Value	$6,00,000		No. of Years	5
Bond Interest Rate	8%		No. of Payments in a year	2
			Market Rate of Interest	10%
1. Issue Price of Bonds
$5,53,670
(Using PV Function in Excel

2. Effective Interest Schedule
Half Year	Date	Opening	Interest @ 10% p.a	Payment	Closing
1	30-06-2019	$5,53,670	$27,684	$24,000	$5,57,354
2	31-12-2019	$5,57,354	$27,868	$24,000	$5,61,221
3	30-06-2020	$5,61,221	$28,061	$24,000	$5,65,282
4	31-12-2020	$5,65,282	$28,264	$24,000	$5,69,546
5	30-06-2021	$5,69,546	$28,477	$24,000	$5,74,024
6	31-12-2021	$5,74,024	$28,701	$24,000	$5,78,725
7	30-06-2022	$5,78,725	$28,936	$24,000	$5,83,661
8	31-12-2022	$5,83,661	$29,183	$24,000	$5,88,844
9	30-06-2023	$5,88,844	$29,442	$24,000	$5,94,286
10	31-12-2023	$5,94,286	$29,713	$6,24,000	$0

(Interest in 10th period is subtracted by 1 due to decimal differences and to make closing balance 0.)

3. Journal Entries
Date	Accounts	Dr.	Cr.
01-01-2019	Bank Dr	$5,53,670
	Deferred Interest Expense Dr	$46,330
	To 8% Bonds		$6,00,000
	(Being issuance of Bonds.)
30-06-2019	Interest Expense Dr	$27,684
	To Bank		$24,000
	To Deferred Interest Expense		$3,684
	(Being First Interest payment.)
31-12-2023	Interest Expense Dr	$29,713
	8% Bonds Dr	$6,00,000
	To Bank		$6,24,000
	To Deferred Interest Expense		$5,713
	(Being last Interest payment and Bond Repayment.)

(B)

Cash Payment	$3,500
Loan Amount	$25,000
Months	15
Interest Rate	9%
1. Monthly Installment
$1,768
=PMT(9%/12,15,25000,0,0)

2. Amortization Schedule
Month	Opening	Interest	Installment	Closing
1	$25,000	$188	$1,768	$23,419
2	$23,419	$176	$1,768	$21,826
3	$21,826	$164	$1,768	$20,222
4	$20,222	$152	$1,768	$18,605
5	$18,605	$140	$1,768	$16,976
6	$16,976	$127	$1,768	$15,335
7	$15,335	$115	$1,768	$13,682
8	$13,682	$103	$1,768	$12,016
9	$12,016	$90	$1,768	$10,337
10	$10,337	$78	$1,768	$8,647
11	$8,647	$65	$1,768	$6,943
12	$6,943	$52	$1,768	$5,227
13	$5,227	$39	$1,768	$3,497
14	$3,497	$26	$1,768	$1,755
15	$1,755	$13	$1,768	$0

3. Journal Entries
Date	Accounts	Dr.	Cr.
01-04-2019	Rafts Dr	$28,500
	To Cash		$3,500
	To Note Payable		$25,000
	(Being purchase of fleet of 10 fishing rafts.)
30-04-2019	Interest Expense Dr	$188
	Note Payable Dr	$1,581
	To Cash		$1,768
	(Being first payment of Installment on Note.)
31-05-2019	Interest Expense Dr	$176
	Note Payable Dr	$1,593
	To Cash		$1,768
	(Being second payment of Installment on Note.)