Question

ABC Company sold bonds with a face value of $3,000,000 for a total of $2,660,976 on June 1, 2015. The bonds will mature in 10 years and have a stated interest rate of 10%. At the date of issues, the market rate was 12%. The bonds pay interest annually on May 31. The bonds are to be accounted for under the effective-interest method.

Instructions

(a) Construct a bond amortization table FOR THE FIRST FOUR YEARS ONLY. The table should indicate the amount of interest paid, the interest expense, and the discount amortization at each May 31. Make sure all columns and rows are properly labeled. (Round to the nearest dollar.)

(b) The sales price of $2,660,976 was determined from present value tables. In your own words, explain how one would determine this price using present value tables and why the calculation is necessary.

(c) Assuming that interest and discount amortization are recorded each May 31, prepare the adjusting entry to be made on December 31, 2017. (Round to the nearest dollar.)

Answer 1

Solution a:

Bond Amortization Schedule
Period	Interest paid	Interest Expense	Discoount Amortized	Unamortized Discount	Carrying Value
1-Jun-15				$339,024	$2,660,976
31-May-16	$300,000	$319,317	$19,317	$319,707	$2,680,293
31-May-17	$300,000	$321,635	$21,635	$298,072	$2,701,928
31-May-18	$300,000	$324,231	$24,231	$273,840	$2,726,160
31-May-19	$300,000	$327,139	$27,139	$246,701	$2,753,299

Solution b:

Computation of bond price
Table values are based on:
n=	10
i=	12%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.32197	$3,000,000.00	$965,910
Interest (Annuity)	5.65022	$300,000.00	$1,695,066
Price of bonds			$2,660,976

The calculation was necessary to determine issue price of bond. If you will sell the bond at face value in the market, no one will buy the bond as market rate of interest is higher than stated rate.

Solution c:

Journal Entries - ABC Company
Date	Particulars	Debit	Credit
31-Dec-17	Interest expense Dr ($2,701,928*12%*7/12)	$189,135.00
	To Interest Payable ($300,000*7/12)		$175,000.00
	To Discount on bond payable		$14,135.00
	(To record interest accrued on bond and discount amortized)