Question

Maul Co. prepared a bond issue dated January 1, 20X2. The face value of the bond was $400,000 with an annual coupon rate of interest 10% and maturity date of 5 years. The bond interest is to be paid semiannually on June 30 and Dec 31. The bonds were issued when the prevailing annual market interest rate was 8%.

1. (show your work) How much was the issue price of the bonds January 1, 20X2?
2. Record the journal entry required for the issuance of the bond (be sure to indicate which entries are debit and which are credit)
3. Record the journal entry required for the first interest payment.
4. Record the journal entry required for the second interest payment.
5. What if the bonds are retired early on January 1, 20X3 after the second interest was paid. The cash paid by the company out in the market was 98% of face value. What is the effect on the balance sheet and income statement from this early retirement.
6. Why would this company want to retire the bonds early? Please give 2 specific reasons.

Problem 2 12 points

Note: Please Refer to the following partial present value tables for this problem.
		Table 1
n=5 periods	4%	5%	8%	10%
PV of $1	0.822	0.784	0.681	0.621
PV of annuity of $1	4.452	4.329	3.993	3.791
FV of $1	1.217	1.276	1.469	1.611
FV of annuity of $1	5.416	5.526	5.867	6.105
n=10 periods	4%	5%	8%	10%
PV of $1	0.676	0.614	0.463	0.386
PV of annuity of $1	8.111	7.722	6.710	6.145
FV of $1	1.480	1.629	2.159	2.594
FV of annuity of $1	12.006	12.578	14.487	15.937

Answer 1

Table values are based on:
n=	10
i=	5.0%
Cash Flow	Amount	Present Value
Interest	$400,000*5% =$20,000	$20,000*PVAF(4%,10) =$20,000*8.111 =$162,220
Principal	$2,000,000	$400,000*PVIF(4%,10) =$4,00,000*0.676 =$270,400
Price of Bonds		$432,620
Premium on bonds =$432,620 - $400,000 =$32,620
Amortization table
Date	Interest Payment	Interest expenses	Premium amorrtization	Bond carrying amount
1 Jan 20X2				4,32,620
June 30 20X2	20,000	17,305	2,695	4,29,925
Dec 31 20X2	20,000	17,197	2,803	4,27,122
June 30 20X3	20,000	17,085	2,915	4,24,207
Dec 31 20X3	20,000	16,968	3,032	4,21,175
June 30 20X4	20,000	16,847	3,153	4,18,022
Dec 31 20X4	20,000	16,721	3,279	4,14,743
June 30 20X5	20,000	16,590	3,410	4,11,333
Dec 31 20X5	20,000	16,453	3,547	4,07,786
June 30 20X6	20,000	16,311	3,689	4,04,097
Dec 31 20X6	20,000	15,903	4,097	4,00,000
	Date	Accounts and explanation	Debit(in $)	Credit(in $)
	1 Jan 20X2	Cash	4,32,620
		Bonds Payable		4,00,000
		Premium on Bonds Payable		32,620
		(To Bond issued at premium)
	June 30 20X2	Interest Expenses	$17,305
		Premium on issue of Bond	$2,695
		Cash		$20,000
		(Premium on Bond amortized for 1st period)
	Dec 31 20X2	Interest Expenses	$17,197
		Premium on issue of Bond	$2,803
		Cash		$20,000
		(Premium on Bond amortized for 2nd period)
	1 Jan 20X3	Bonds payable	4,00,000
		Premium on Bonds	27,122
		Cash		3,92,000
		Gain on retirement of bonds		35,122