You don't say what period you're trying to account for.
Book value of debt: 1,500,000 * 0.93496 = $1,402,440
[Discount is 1,500,000 - 1,402,440 = 97,560]
at May 31...
1,402,440 * (0.09 / 2) = 63,109.80
1,500,000 * ( 0.08/2) = $60,000
63,109.80 - 60,000 = 3,109.80 amortizes the discount (add to book and repeat)...
at Nov. 30...
(1,402,440 + 3,109.80) * (0.09/2) = 63,249.74
1,500,000 * ( 0.08/2) = 60,000
(63,249.74 - 60,000) = 3,249.72 add to book and repeat
at maturity, the book value will equal par (1.5m) which is what will be repaid (you've fully amortized the discount at that point such that book = par)
Technically, you'd accrue one month of interest in the "current" year, if FYE is Dec. 31.
A bond consists of two promises. It promises to pay $1,000 on the maturity date, and it promises to pay periodic interest. The interest payments are determined by the coupon rate. If the coupon rate of interest is more than the market rate, the bond will sell at a premium because it is more attractive than the rate available in the market. So it's price will be bid up. The bidding will stop when its yield to maturity equals the market interest rate. If the coupon rate is less than the market rate, the bond will sell at a discount.
By discounting the two future cash flows to the present using the market interest rate, you can find the present value of the bond, the price at which it will sell. In a diagram you have
PV - - - PMT - - - PMT - - - - - - PMT - - - PMT + $1,000
PMT is the interest payment calculated from the coupon rate. The number of payments is determined by the life of the bond. So you have variables whose values are known and you can solve for any unknown variable when you know the others. The simplest way is using a financial calculator. The variables are
Maturity value - $1,000 face value per bond
Coupon rate - determines size of PMT
PMT = periodic interest = Face value * coupon rate * time
Number of periods is usually semiannual, sometimes annual
Market rate: Used to discount future cash flows
PV = present value of the future cash flows
A bond's coupon rate is fixed and does not change during the life of the bond. But market interest changes in reaction to a variety of economic conditions. So if a bond has a 5% coupon rate, and investors can now earn only 4% in the market, the 5% bond will be very attractive. Investors will all want it so they will bid for it and its price will go up. That is, when market interest rates fall below the bond's coupon rate the price of the bond will increase.
The opposite is true if market interest rates go up. The price of the bond will go down. If investors can earn 6% interest why should they buy a bond that pays only 5%. They will buy it only if the price is low enough to yield 6%. So bond prices move in opposite directions from interest rate.
Your bonds are reported in the balance sheet as
Bonds Payable . . . . 1,500,000
Less discount on bonds . . 97.560 . . .1,402,440
The interest that has to be paid every six months is $1,500,000 * .04. That's what the bond contract requires. But the bonds were sold at a discount which means the actual cost of interest is 4.5% every six months. So to find the interest expense, you multiply the book value of the bonds by .045. That gives you the journal entry
dr. Interest expense
cr. . . . . . Cash
cr . . . . . .Discount on bods payable
This entry reduces the bond discount, increasing the book value of the bonds, so the next interest payment will require the same amount of cash but somewhat more interest expense. The method will amortize the discount completely by the time the bonds mature.
I've been trying to figure out this question for awhile now but I can't seem to figure out how they solve it. I have the answers already but they don't give you the calculations or the steps on how to gets them. Can somebody go through it step by step?
On November 30 they issued a $1,500,000 5-year bond at 8% when the market rate was 9%. It sold at 93.496 and they will account for the interest on this bond using the effective interest rate calculation method. Interest payments will also be made on May 31 and November 30 of each year.
