We see, as Don G above began, the bonds are issued for $136,526. This figure emerges from using a financial calculator. This leaves the account Discount on Bonds Payable with a balance of 150K-136,526 = $13,474.
The Journal Entry for issuing bonds is :
Dr. Cash $136,526
Dr. Discount on Bonds Payable $13,474
Cr. Bonds Payable $150,000
On June 30, we recognize interest expense. Since we are using the effective interest method, the expense we recognize is the amortized portion of DoBP plus the coupon payment. The coupon payment is 2%*0.5*150,000=$1,500. We recognize, however, 2% (4%/2) of the bond's carrying value as interest expense. This is 0.02*136,526=2730.52.
We amortized 2730.52-1500=1230.52 of the DoBP, so we add this to the bond's carrying value to get 136526+1230.52=137756.5.
For December 31, 2014, we do the same thing:
2%*137,756.5=2755.13. This is interest expense.
Then, we amortized 2755.13-1500=1255.13 on the DoBP, so we add this to the bond's carrying value to get: 137756.5+1255.13=139011.7
On 6/30/14, $1500 is paid to bondholders, which represents the coupon payment.
Same thing for 12/31/14: $1500.
On 6/30/14, our journal entry is:
Dr. Int Expense 2730.52
Cr. DoBP 1230.52
Cr. Cash 1500
On 12/31/14, we record this:
Dr. Int Exp 2755.13
Cr. DoBP 1255.13
Cr. Cash 1500
Book value of the bonds on 6/30/14 is the carrying value stated above, 137756.52.
On 12/31/14, it is 139011.7, again stated above.
Interest expense in 2015 will be greater than 2014 interest expense. As we amortize more of the bond's discount each period, we add to the carrying value of the bonds. We recognize interest expense as a fixed percentage of the book value, so necessarily if we add more to book value, int expense will rise.
The PV of the bonds, with N 10, R 2%, PMT 1,500, is 136,526. Each interest payment will be 1,500. Interest expense on June 30 will be 2,731 (2% of the Carrying Value, whose beginning balance was 136,526.) Amortization of Bond Discount = 2,731 less 1,500.
That should get you started.
Okay so I have this homework due and I don't even know where to start??? Please help me get the correct answer and explain it... Im having a really difficult time.
On January 1, 2014 AF Inc. issued $150,000 in bonds that mature in 5 years. The bonds have a stated annual interest rate of 2% and pay interest on June 30 and December 31 each year. When the bonds were issued, the market rate of interest was 4%. AF Inc. uses the effective interest method
to account for long-term bonds
How much cash was received from the issuance of the bonds? (round answer to whole $)
? What journal entry was made on January 1, 2014 to
record the bond issuance?
? What amount of interest expense should be recorded
on June 30, 2014?
What amount should be recorded on Dec. 31, 2014? (round to whole $)
? What amount of interest was paid to bond holders on June 30, 2014?
What amount will be paid to them on December 31, 2014? (round to whole $)
? What journal entry was made on June 30, 2014 to re
cord the interest paid on the bonds? What entry will be made on December 3 1, 2014? (round to whole $)
? What is the book value of the bonds on June 30, 2014? What is the book value of the bonds on December 31, 2014? (round to whole $)
? Will interest expense recognized in 2015 be greater than, equal to or less than interest expense recognized in 2014?
