Question

3. Harpe Co. sold S4 million of 10-year bonds on December 31, 2015, with interest payable June 30 and December 31 at an annual rate of 12%. The bonds were priced to yield an effective rate of 14%. a. What were the proceeds received by Harpo upon the sale of the bonds? b. Prepare the entry made by Harpo to record the sale of the bonds on December 31, 2015 e. What is the total amount of interest payments to be made by Harpo over the life of the bonds? d. What is the total amount of interest expense that Harpo will record over the life of the bonds? e. What will be the net book value of the bonds at December 31, 2019, after the company makes the eighth semiannual cash interest payment? f. Prepare the entry to record the ninth semiannual payment on June 30, 2020.

Answer 1

Answer is given below

Bonds are issued at discount since interest rate is lower than market yeild

Refer amortization schedule at bottom for working

Amount PV factor at 7% 0.2584 10.594 Face value of Bond $4,000,000 Interest - semi-annual (12% p.a) $240,000 Issue price. Proceeds of sale of bond Face value Discount on issue of Bonds PV of Cash flows $1,033,676 $2,542,563 $3,576,239 $4,000,000 $423,761 Credit b Issuance of bonds Date Account Titles and explanation December 31, 2015 Cash Discount on issue of Bonds To Bonds payable (To record issue of bond) Debit $3,576,239 $423,761 $4,000,000 c Total amount of interest payment over life of bond $4,800,000 d Total amount of interest expense that will be recorded $5,223,761 e Net Book value of the bonds December 31, 2019 $3,682,293| Credit Debit $257,760 f Ninth semi-annual interest payment Date Account Titles and explanation June 30, 2020 Interest Expense To Discount on issue on bonds To Cash (To record interest payment) $17,760 $240,000 Amortization Table Interest Discount Expense amortization at 7% Cash Paid Interest Period Carrying Amount December 31, 2015 June 30, 2016 December 31, 2016 June 30, 2017 December 31, 2017 June 30, 2018 December 31, 2018 June 30, 2019 December 31, 2019 June 30, 2020 December 31, 2020 June 30, 2021 December 31,2021 June 30, 2022 December 31,2022 June 30, 2023 December 31,2023 June 30, 2024 December 31, 2024 June 30, 2025 December 31,2025 Total $240,000 $240,000 $240,000 $240,000 $240,000 $240,000 $240,000 $240,000 $240,000 $240,000 $240,000 $240,000 $240,000 $240,000 $240,000 $240,000 $240,000 $240,000 $240,000 $240,000 $4,800,000 $250,337 $251,060 $251,835 $252,663 $253,549 $254,498 $255,513 $256,599 $257,760 $259,004 $260,334 $261,757 $263,280 $264,910 $266,654 $268,519 $270,516 $272,652 $274,938 $277,383 $5,223,761 $10,337 $11,060 $11,835 $12,663 $13,549 $14,498 $15,513 $16,599 $17,760 $19,004 $20,334 $21,757 $23,280 $24,910 $26,654 $28,519 $30,516 $32,652 $34,938 $37,383 Unamortized Discount Balance $423,761 $413,424 $402,363 $390,529 $377,866 $364,317 $349,819 $334,306 $317,707 $299,947 $280,943 $260,609 $238,852 $215,572 $190,662 $164,008 $135,488 $104,973 $72,321 $37,383 $3,576,239 $3,586,576 $3,597,637 $3,609,471 $3,622,134 $3,635,683 $3,650,181 $3,665,694 $3,682,293 $3,700,053 $3,719,057 $3,739,391 $3,761,148 $3,784,428 $3,809,338 $3,835,992 $3,864,512 $3,895,027 $3,927,679 $3,962,617 $4,000,000 $0