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Corporation: Example

The document provides information about bonds issued by Grider Industries on May 1, 2010 for $6,000,000 with an interest rate of 8%, payable semiannually. The bonds were sold at a price to yield an effective interest rate of 10%. The amortization schedule calculates the interest expense and discount amortization for the first year using the effective interest method. Journal entries are provided to record the cash interest payments, discount amortization, and interest expense.

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ibrahim mohamed
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117 views3 pages

Corporation: Example

The document provides information about bonds issued by Grider Industries on May 1, 2010 for $6,000,000 with an interest rate of 8%, payable semiannually. The bonds were sold at a price to yield an effective interest rate of 10%. The amortization schedule calculates the interest expense and discount amortization for the first year using the effective interest method. Journal entries are provided to record the cash interest payments, discount amortization, and interest expense.

Uploaded by

ibrahim mohamed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Corporation 14

Example

On January 1, 2013, Masterwear industries called its $700,000, 12% bonds when their carrying amount was

$676,288. The indenture specified a call price of $685,000.

The bonds were issued previously at a price yield 14%

Bonds Payable 700,000

Loss on early extinguishment ‫متمم‬ 8712

Discount on bond payable (700,000 – 676,288) 23,712

Cash 685,000
Corporation 15

Problem (1):
On January 1, 2011, Piper Co. issued ten-year bonds with a face value of $1,000,000 and a
stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were
sold to yield 12%.

Instructions
(a) Calculate the issue price of the bonds.
(b) Prepare the amortization table for 2011, assuming that amortization is recorded on
interest payment dates
(c) Prepare journal entry for piper co. for year 2011

Solution
10% 12%
P= 1,000,000 stated rate = = 5% Market rate = = 6% N= 10 x 2 = 20
2 2

Maturity value of bonds payable 1,000,000


Present value of principle 311,800
Principle x P.V. $1 (n=20 i=6%)
1,000,000 X 0.3118

Present value of interest payable 573,495


Interest x P.V.O.A (n=20 i=6%)
(1,000,000 x 5%) = 50,000 X 11.4699

proceeds from sale of bonds 885,295


= Discount on bonds payable 114705

Date Cash Interest Discount Carrying amount of


Paid Expense (6%) Amortized Bonds
1/1/2011 885,295
30/6/2011 50000 53,117.7 3,117.7 888,412

31/12/2011 50000 53,304.7 3,304.7 891716

Piper Co. (Issuer)


(Jan. 1) Cash 885,295
Discount on bonds 114705
Bond payable 1,000,000
July 1, interest expense 53,117.7
Discount on bond 3,117.7
Cash 50,000
Dec 1, interest expense 53,304.7
Discount on bond 3,304.7
Cash 50,000
Corporation 16

Problem (2):
Grider Industries, Inc. issued $6,000,000 of 8% debentures on May 1, 2010 and received cash
totaling $5,323,577. The bonds pay interest semiannually on May 1 and November 1.
The maturity date on these bonds is November 1, 2018.
The firm uses the effective-interest method of amortizing discounts and
premiums. The bonds were sold to yield an effective-interest rate of 10%.
Instructions
Calculate the total dollar amount of discount or premium amortization during the first year
(5/1/10 through 4/30/11) these bonds were outstanding.

Solution
8% 10%
P= 6,000,000 stated rate = = 4% Market rate = = 5% selling price
2 2
= 5,323,577
Date Cash Interest Discount Carrying
Paid Expense Amortized amount
(6,000,000 x (5%) of Bonds
4%)
1/5/2010 $5,323,577
1/11/2010 240,000 266,178 26,178 5,359,755

1/5/2011 240,000 267,487 27,487 5,387,242

Piper Co. (Issuer)


1/5/2010 Cash 5,323,577
Discount on bonds 676,423
Bond payable 6,000,000
1/11/2011, interest expense 266178
Discount on bond 26,178
Cash 240,000
31/12/2010 2 89,329
interest expense 5,359,755 x 5% x
6
89,329
interest payable
1/5/2011 Interest payable 89,329
Interest expense (267,487 – 89,329) 178,158
Discount on bonds 27,487
Cash 240,000

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