Question

Hambelton Ltd. issued $4,000,000 of 5% bonds payable on 1 September 20X9 to yield 4%. Interest on the bonds is paid semi-annually and is payable each 28 February and 31 August. The bonds were dated 1 March 20x8, and had an original term of five years. The accounting period ends on 31 December. The effective interest method is used. PV of $1. PVA of $1. and PVAD of $1.) (Use appropriate factor(s) from the tables provided.) Required: 1. Determine the price at which the bonds were issued. (Round time value factor to 5 decimal places. Do not round intermediate calculations. Round your final answer to the nearest whole dollar amount.) 2. Prepare a bond amortization table for the life of the bond. (Round time value factor to 5 decimal places. Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount. Leave no cells blank be certain to enter"0" wherever required.) 3. Prepare journal entries to record the issuance of the bonds, payment of interest, and all necessary adjustments through to the end of 20X10. (If no entry is required for a transaction/event, select "No journal entry required in the first account field. Round your answers to the nearest whole dollar amount.) Journal entry worksheet

Answer 1

Solution

Hambelton Ltd

1. Determination of the price at which the bonds were issued:

Calculation of the issue price of the bond:

Issue Price = $4,179,500

Computations:

Issue price of bond = present value of bond + present value of interest payments

Present value of bond –

Maturity value = $4,000,000

Semi-annual periods, n = 5 x 2 = 10

Coupon rate = 5%

Market yield rate = 4%

Effective interest rate for semi-annual period = 4% x ½ = 2%

Present value of bond = maturity value x (P/F, 2%, 10)

= $4,000,000 x 0.8203 = $3,281,200

Present value of interest payments –

Semiannual interest payments = 4,000,000 x 5% x 6/12 = $100,000

Present value of interest payments = 100,000 x (P/A, 2%, 10)

= 100,000 x 8.983 = $898,300

Issue price of bond = $3,281,200 + $898,300 = $4,179,500

Since, the issue price of bond is higher than the maturity value, the bond is issued at premium.

Premium on bond issue = Issue price - maturity value

= 4,179,500 – 4,000,000 = 179,500

2. Amortization Schedule:

Bond Amortization Schedule
Date	Interest Payment	Interest Expense	Premium Amortization	Unamortized Premium	Net Bond Liability
Opening	-	-	-	$179,500	$4,179,500
Feb 28, 20X10	$100,000	$83,590	$16,410	$163,090	$4,163,090
Aug 31, 20X10	$100,000	$83,262	$16,738	$146,352	$4,146,352
Feb 28, 20X11	$100,000	$82,927	$17,073	$129,279	$4,129,279
Aug 31, 20X11	$100,000	$82,586	$17,414	$111,865	$4,111,865
Feb 28, 20X12	$100,000	$82,237	$17,763	$94,102	$4,094,102
Aug 31, 20X12	$100,000	$81,882	$18,118	$75,984	$4,075,984
Feb 28, 20X13	$100,000	$81,520	$18,480	$57,504	$4,057,504
Aug 31, 20X13	$100,000	$81,150	$18,850	$38,654	$4,038,654
Feb 28, 20X14	$100,000	$80,773	$19,227	$19,427	$4,019,427
Aug 31, 20X14	$100,000	$80,389	$19,611	$180	$4,000,000 (approximately)

Calculations:

Semi-annual interest payment = maturity value x 5% x ½ = 4,000,000 x 5% x ½ = $100,000

Semi-annual interest expense = net bond liability x 2%

For instance, Feb 28, 20X0 interest expense = 4,179,500 x 2% = 83,590

Premium amortization = interest payment – interest expense = 100,000 – 83,590 = $16,410

Unamortized premium = outstanding premium balance – premium amortization

= 179,500 – 16,410 = $163,090

Net bond liability = beginning bond liability – premium amortization

= 4,179,500 – 16,410 = $4,163,090

3. Journal Entries:

Date	Account Titles	Debit	Credit
Sep 1, 20X9	Cash	$4,179,500
	Premium on Bonds Payable		$179,500
	Bonds Payable		$4,000,000
	(To record issue of bonds)
Feb 28, 20X10	Interest Expense	$83,590
	Premium on Bonds Payable	$16,410
	Cash		$100,000
	(To record semi-annual interest payment)
Aug 31, 20X10	Interest Expense	$83,262
	Premium on Bonds Payable	$16,738
	Cash		$100,000
	(To record semi-annual interest payment)
Dec 31, 20X10	Interest Expense	$55,285
	Premium on Bonds Payable	$11,382
	Interest Payable		$66,667
	(To record interest accrued)

Note:

1. Interest expense as on Dec 31, 20X10 –

4,146,352 x 2% x 4/6 months = $55,285

2. Interest payable = 100,000 x 4/6 = $66,667
3. Premium on bonds payable = 66,667 – 55,285 = $11,382

4. Interest expense to be recorded in each of 20X9 and 20X10 –

Interest expense 20X9 –

Interest Expense = 4,179,500 x 2% x 4/6 = $55,727

Interest payable = 100,000 x 4/6 = $66,667

Premium amortization = 66,667 – 55,727 = $10,940

Net bond liability = 4,179,500 – 10,940 = $4,168,560

Interest expense 20X10 –

Interest expense = (4,179,500 – 10,940) x 4% = $166,742

Interest payable = $4,000,000 x 5% = $200,000

Premium amortization = 200,000 – 166,742= $33,258

Net bond liability = 4,168,560 – 33,258 = $4,135,302

5. Statement of financial position as on Dec 31, 20X9 and 20X10;

Hambelton Ltd
Statement of Financial Position
As on December 31, 20X9		December 31, 20X10
Liabilities
Bonds Payable	$4,168,560	$4,135,302
Premium on Bonds Payable	$168,560	$135,302
	$4,000,000	$4,000,000