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Cron Corporation is planning to issue bonds with a face value of $700,000 and a coupon rate of 13 percent. The bonds mature in five years and pay interest semiannually every June 30 and December 31. All of the bonds were sold on January 1 of this year. Cron uses the effective-interest amortization method. Assume an annual market rate of interest of 12 percent.

1. What was the issue price on January 1 of this year ?2. What amount of interest expense should be recorded on June 30 and December 31 of this year?3. What amount of cash should be paid to investors June 30 and December 31 of this year?4. What is the book value of the bonds on June 30 and December 31 of this year?

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Answer:

issue $700,000 in 5 year bonds that pay 13% semiannual coupons (coupon = $45,500)

market interest rate 12%, so bonds will be sold at a premium

1) What was the issue price on January 1 of this year?

issue price = present value of face value + present value of interest payments

  • present value of face value = $700,000 / (1 + 6%)¹⁰ = $390,876
  • present value of annuity = $45,500 x {1 - [1 / (1 + 6%)¹⁰]} / 6% = $334,884

issue price = $390,876 + $334,884 = $725,760

journal entry to record issuance of the bonds:

Dr Cash 725,760

    Cr Bonds payable 700,000

    Cr Premium on bonds payable 25,760

2) What amount of interest expense should be recorded on June 30 and December 31 of this year?

amortization of bond premium June 30 = ($725,760 x 6%) - ($700,000 x 6.5%) = $43,546 - $45,500 = -$1,954

Journal entry June 30th, first coupon payment:

Dr Interest expense 43,546

Dr Premium on bonds payable 1,954

    Cr Cash 45,500

amortization of bond premium December 31 = ($727,714 x 6%) - ($700,000 x 6.5%) = $43,663 - $45,500 = -$1,837

Journal entry December 31st, second coupon payment:

Dr Interest expense 43,663

Dr Premium on bonds payable 1,837

    Cr Cash 45,500

3) What amount of cash should be paid to investors June 30 and December 31 of this year?

$45,500 per coupon payment

4) What is the book value of the bonds on June 30 and December 31 of this year?

Book value on June 30th:

Bonds payable $700,000

Premium on bonds payable $23,806

Book value on December 31st:

Bonds payable $700,000

Premium on bonds payable $21,969

1. Issue price = $390,876 + $334,884 = $725,760

2. Amortization of bond premium June 30 = -$1,954

3. $45,500 per coupon payment

Prepare the journal entry

When the Issue $700,000 in 5 year bonds that pay 13% semiannual coupons (coupon is = $45,500)

Then the market interest rate is 12%, so bonds will be sold at a premium

1) The issue price is = present value of face value + present value of interest payments

After that, present value of face value is = $700,000 / (1 + 6%)¹⁰ = $390,876

Then, present value of annuity = $45,500 x {1 - [1 / (1 + 6%)¹⁰]} / 6% = $334,884

Now, issue price is = $390,876 + $334,884 = $725,760

The journal entry to record issuance of the bonds:

Dr Cash 725,760

Cr Bonds payable 700,000

Cr Premium on bonds payable 25,760

2) The amortization of bond premium June 30 is = ($725,760 x 6%) - ($700,000 x 6.5%) = $43,546 - $45,500 = -$1,954

Then, The Journal entry June 30th, first coupon payment:

Dr Interest expense 43,546

Dr Premium on bonds payable 1,954

Cr Cash 45,500

Now, amortization of bond premium December 31 is = ($727,714 x 6%) - ($700,000 x 6.5%) = $43,663 - $45,500 = -$1,837

Then, prepare the Journal entry December 31st, second coupon payment:

Dr Interest expense 43,663

Dr Premium on bonds payable 1,837

Cr Cash 45,500

3) $45,500 per coupon payment

4) The Book value on June 30th:

Bonds payable $700,000

Premium on bonds payable $23,806

Book value on December 31st:

Bonds payable $700,000

Premium on bonds payable $21,969

Find more information about Journal entry here:

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