Question

In part A, you will be accounting for a long-term bond issuance.

Part A – On January 1, 2017, Cheng Inc., issued $200,000 of 8%, 15 year bonds, yielding an effective interest rate of 10%. Semiannual interest is payable on June 30 and December 31. The firm uses effective interest method to amortize any discount or premium.

Required:

1. Determine the issuance price of the bonds and provide the journal entry recorded (impact on the financial statement equation) on January 1, 2017.

2. Prepare the journal entry (impact on the financial statement equation) for the December 31, 2017 interest payment.

3. Determine the interest expense reported on the 2017 income statement.

4. Determine the carrying value of the bonds on the 12/31/2017 balance sheet.

Answer 1

	Bond characterstics				Amount
1-a)	Principal				200,000
	interest				8,000
	Market interest rate				5%
	periods to maturity				30
	issue price				169,256
	Calculation of bond issue price
	Where
	i=	5.00%
	t=	30
	principal		*	PV of $1 at 5% for 30 yrs =
	200,000		*	0.23138		=	46276
	interest		*	PV of ordinary annuity at 5%=
	8000		*	15.37245		=	122980
	bond issue price						169256

	Cash	interest	increase	Carrying
Date	paid	expense	in CV	value
1/1/2018				169,256
6/30/2017	8,000	8463	463	169718
12/31/2017	8,000	8486	486	170204
Date	Account titles & Explanations				Debit	Credit
1/1/2017	Cash				169,256
	Discount on bonds				30,744
	bonds payable					200,000
12/31/2017	interest expense				8486
	discount on bonds payable					486
	cash					8000
3)	interest expense reported -			16949
4)	Carrying value of bonds			170204