Question

4 ISSUANCE, INTEREST AMORTIZATION, RETIREMENT AND CONVERSION OF BONDS on January 1, 2017, Maytair Co. issued ten-year convertible bonds with a face value of $300,000 and a stated interest rate of 12%, payable semiannually on June 30 and December 31. The bonds were sold to yield 10. Table values are Present value of 1 for 10 periods at 10 Present value of 1 for 10 periods at 12% Present value of 1 for 20 periods at 5 Present value of 1 for 20 periods at 6% Present value of annuity for 10 periods at 108 Present value of annuity for 10 periods at 128 Present value of annuity for 20 periods at 5 Present value of annuity for 20 periods at 6% 0.38554 0.32197 0.37689 0.31180 6.14457 5. 65022 12.46221 11.46992 Instructions a) calculate the issue price of the bonds in dollars. (3 points) b) Calculate the issue price as a percentage (2 points) c) Prepare the journal entry to record the issue of the bonds. (2 pointa) d) Prepare the amortization table for 2017 and 2018, assuning that anortization is recorded using the effective-interest method. (10 points) e) Prepare the necessary journal entries to record interest expense for 2018. 4 points) ) on January 1, 2019 Mayfair Co. retired $100,000 of bonds at 108. ti s Calculate the gain or loss on retirement (2 pointa) ii Make the necessary journal entry to record the bonds retirement. (2 points) (g) ) On January 1, 2019, Mayfair converted 40% of bonds to common stock. Each bond is converted to 100 shares of the $8 par value common stock. Make the journal entry to record the conversion. i Calculate the number of physical bonds being converted (2 points) i Calculate the number of shares to be received (2 points) ii Make the necessary journal entry to record the bonds conversion. (2 points)

Answer 1

$300,000 12.00% Ans a Face Value Coupon Rate Coupon Payment Market Rate Maturity Period Semi-annually 10.00% 10 Since the coupon payment is semi-annually, hence Coupon Rate consider for calculation [12%/2] Coupon Payment [$300000 x 696] Market Rate Consider for Calculation [10%/2 Period [10 x 2] 6.00% $18,000 5.00% 20 Present Value of Coupon Payments Present Value of Annuity for 20 periods at 5% Present Value of Coupon Payments [S18000 x 12.46221] 12.46221 $224,320 Present Value of Maturity Value Present Value of $1 for 20 periods at 5% Present Value of Maturity Value [S300000 x 0.37689] 0.37689 $113,067 Present Value of Bond Present Value of Coupon Payment+ Present Value of Maturity Value Present Value of Bond [$224320+ $113067] Issue price of the Bond $337,387 $337,387 Ans bIssue price as a percentage [S337387/5 112% ournal Ent Ans c Date Particulars Debit Credit Jan 1 2017 Cash 5337,387 Premium on Bond Payable Bond Payable $37,387 $300,000 To Record issue of bond

Ans d The effective interest rate is also called as market rate. It is the investor's yield maturity. When the effective interest rate is lower as compared bond coupon rate then, the bonds were issued at a premium. The premium is then amortised over the period of bond by using effective interest rate method. Under this method, interest expense is derived by multiplying the bond carrying value with the effective interest rate applicable when the bonds were issued. The difference between the interest expense and actual interest paid is the premium which will be amortised Amortisation schedule (Effective Interest Method) Opening book Balance 641 Interest Expense Amortisation Closing Book Date Coupon Payment (Premium) (D)-(B)-(C ) 1 Value (C)-[(A) x 5% | | (A)+(C )-(B) $337,387 $336,256 5335,069 $333,822 332,513 1-Jan-17 30-Jun-17 $337,387 $18,000 $18,000 $18,000 $16,869 $16,813 $16,753 $16,691 $1,131 $1,187 $1,247 $1,309 31-Dec-17 $336,256 30-Jun-18 31-Dec-18 5335,069 $333,822