Financial Information
DIscount Amortization Schedule and retire before Maturity??? Please help?
here is the question.
Company X sold $500,000 of 12% bonds on january 1,2006 for $470,143. 47, a price that yields a 14% interest rate. The bonds pay interest semiannually on June 30 and December 31 and due December 31, 2009. The company uses the effective interest method. .
Required::::
1) Prepare an interest expense and discount amortization schedule
2) Assume the company reacquired the bonds on July 1, 2008 at 104. Prepare journal entries to record the bond retirement.
Please help me. . anything you know. . .
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#2 written by sbjnyc 1 year ago
The bonds earn a 14% yield for its investors but pays a 12% coupon. This means that the other 2% earned by the investors comes from the accrual of the discount.
When the bond is issued, the investors pay $470,143.47 and that is their amortized cost at time 0. When the bond matures the amortized cost should equal the par value.
They earn interest on a semiannual basis for 4 years which means there are 8 periods (4 years * 2 semiannual payments)
The coupon rate is 12% and is paid based on the par value of $500,000. So on a semiannual basis the bond pays $500,000*12%/2 = $30,000
The investors earn 14% semiannually on the $470,143.47 so in period 1 they should earn $470,143.47*14%/2 = $32,910.04. However, as they earn a $30,000 coupon every 6 months, the difference of $2,910.04 is used to increase the amortized cost. With the $30,000 coupon and an increase in the amortize cost of the bond by $2,910.04 to $473,053.51 the investor has earned exactly 7% (14% over 1 semiannual period).
This process is done for each period to generate the amortization schedule.
Using this you generate this amoritzation schedule
|Amortized Cost|Change in Cost
01/01/06|470,143.47|
06/30/06|473,053.51|2,910.04
12/31/06|476,167.26|3,113.75
06/30/07|479,498.97|3,331.71
12/31/07|483,063.89|3,564.93
06/30/08|486,878.37|3,814.47
12/31/08|490,959.85|4,081.49
06/30/09|495,327.04|4,367.19
12/31/09|499,999.94|4,672.89For part 2 you’ll see that June 30, 2008 has an amortized cost of $486,878.37 so depending on whether the bonds are reacquired at par or at amortized cost you can generate the approciate entries.
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The 1st column n is for periods; 2nd, 14% interest yield; 3rd, 6% periodic interest paid; 4th bond carrying value. The bond discount amortization is 14% interest yield less 12% periodic interest paid. Carrying value is bond’s last period carrying value plus the bond discount amortization.
n|14% interest|Interest paid|Carrying value|
0|Value upon issue|470143.51|
1|32910.05|30000|473,053.56|
2|33113.75|30000|476167.31|
3|33331.71|30000|479499.02|
4|33564.93|30000|483063.95|
5|33814.48|30000|486878.43|
6|34081.49|30000|490959.92|
7|34367.19|30000|495327.11|
8|34672.89|30000|500000.00|
Journal entry to record bond retirement:
Debit: Bonds payable $500,000.00
Debit: Loss on bond retirement $53,121.57
Credit: Discount on bonds payable $33,121.57
Credit: Cash $520,000.00