Question

On January 1, 2019, Shields, Inc., issued $800,000 of 9%, 20-year bonds for $879,172, yielding a market (yield) rate of 8%. Semiannual interest is payable on June 30 and December 31 of each year. a. Show computations to confirm the bond issue price. b. Prepare journal entries to record the bond issuance, semiannual interest payment and premiun E9-46. amortization on June 30, 2016, and semiannual interest payment and premium amortization on December 31, 2016. Use the effective interest rate method. c. Post the journal entries from part b to their respective T-accounts. d. Record each of the transactions from part b in the financial statement effects template.

Answer 1

Answer:

cash 879,172 debit

   bonds payble   800,000 credit

   premium on BP    79,127 credit

--to record issuance--

Interest expense 35,166.84 debit

premium on BP      833.16 debit

cash                    36,000 credit

--to record first interest payment--

Interest expense 35133.52 debit

premium on BP          866.48 debit

cash                       36,000 credit

--to record second interest payment--

Financial Statement effect:

Cash flow:

financing:

proceed from bonds 879,172

interest paid                 72,000

Net income

interest expense 35,133.52 + 35,166.84 = 70.250,36

Balance sheet

Bonds payable   800,000

Premium on Bonds 77,471

Explanation:

The price will be the discounted future coupon and maturity payment at market rate

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C 36,000.000 (800,000 x 9% x 1/2)

time 40 ( 20 years x 2)

rate 0.04 (8% x 1/2)

$36000 \times \frac{1-(1+0.04)^{-40} }{0.04} = PV$

PV $712,539.8598

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity   800,000.00

time   40.00

rate  0.04

$\frac{800000}{(1 + 0.04)^{40} } = PV$  

PV   166,631.24

PV c $712,539.8598

PV m  $166,631.2357

Total $879,171.0955

The interest expense will be the carrying value times market rate

the cash outlay will be the same for each period:

principal x coupon rate x half-year as payment are semiannual.

800,000 x 0.09 x 1/2 = 36,000

The difference between each one will determinate the amortization onthe premium