1.
Calculate the issuance price of the bonds on January 1 of this Year.
1.
Explanation of Solution
Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.
Effective-interest method of amortization: It is an amortization model that apportions the amount of bond discount or premium based on the market interest rate.
Present Value: The current value of an amount that is to be paid or received in future is called as present value.
Determine the issuance price of the bonds.
Step 1: Calculate the cash interest payment for bonds.
Step 2: Calculate the present value of cash interest payment.
Particulars | Amount |
Interest payment (a) | $18,750,000 |
PV factor at annual market interest rate of 2% for 20 periods (b) | 16.35143 |
Present value | $306,589,313 |
Table (1)
Note: The present value factor for 20periods at 2% interest would be 16.35143 (Refer Appendix E (Table E.2) in the book for present value factor).
Step 3: Calculate the present value of single principal payment of $750,000,000 (principal amount) at 2% for 20 periods.
Particulars | Amount |
Single principal payment (a) | $750,000,000 |
PV factor at annual market interest rate of 2% for 20 periods (b) | 0.67297 |
Present value | $504,727,500 |
Table (2)
Note: The present value factor for 20periods at 2% interest would be 0.67297 (Refer Appendix E (Table E.1) in the book for present value factor).
Step 4: Calculate the issue price of the bonds.
Hence, The issuance price of the bondson January 1 of this Year is $811,316,813.
2.
Calculate the amount of interest expense that should be recorded on June 30 of this year.
2.
Explanation of Solution
Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.
Interest Expense: The cost of debt which is occurred during a particular period of time is called interest expense. The interest amount is payable on the principal amount of debt at a fixed interest rate.
Calculate the amount of interest expense that that should be recorded on June 30 of this year.
Hence, amount of interest expense that should be recorded on June 30 of this year is $16,226,336.
Calculate the amount of interest expense that should be recorded on December 31 of this year.
Explanation of Solution
Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.
Interest Expense: The cost of debt which is occurred during a particular period of time is called interest expense. The interest amount is payable on the principal amount of debt at a fixed interest rate.
Calculate the amount of interest expense that that should be recorded on December 31 of this year.
Hence, amount of interest expense that should be recorded on December 31 of this year is $16,175,863.
3.
Calculate the amount of cash that should be paid to investors on June 30 of this year.
3.
Explanation of Solution
Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.
Calculate the amount of cash that should be paid on June 30 of this year.
Hence, amount of cash that should be paid on June 30 of this year is $18,750,000.
Calculate the amount of cash that should be paid on December 31 of this year.
Explanation of Solution
Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.
Calculate the amount of cash that should be paid on December 31 of this year.
Hence, amount of cash that should be paid on December 31 of this year is $18,750,000.
4.
Calculate the book value of the bonds on June 30 of this year.
4.
Explanation of Solution
Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.
Determine the book value of the bonds on June 30 of this year.
Hence, the book value of the bonds on June 30 of this year is $808,793,149.
Calculate the book value of the bonds on December 31 of this year.
Explanation of Solution
Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.
Determine the book value of the bonds on December 31 of this year.
Hence, the book value of the bonds on December 31 of this year is $806,219,012.
Want to see more full solutions like this?
Chapter 10 Solutions
CONNECT FINANCIAL ACCOUNTING >I<
- ABC Co. is contemplating on investing on 12%, 3-year p1,000,000 bonds. Pricipal is due at maturity date but interest is due annually at each year-end. Market rate on January 1, 20x1 is 10%. Information regarding the fair values follows: December 31, 20x2 is 104, December 31, 20x3 is 105 Please provide entries on reclassification date under the following scenarios changes in business model in 20x2 a. Amortised cost to FVPL b. PVPL to Amortised cost c. Amortised cost to FVOCI-mandatory Requirement: Prepare jounal entriesarrow_forwardDate Event Sept. 1, YR01 Purchased $2,000 of bonds issued by Target Inc. The bonds were purchased at 104 and Honda also paid a broker’s fee of $60. These bonds have a coupon rate of 6% and pay interest once each year, on February 1st. The bonds are dated February 1, YR01, and mature on February 1, YR06 (five-year term). At present Honda does not have a definite plan for this investment beyond earning interest income. At the purchase date these bonds have an effective yield to maturity of 4.2%. REQUIRED: Prepare a partial amortization schedule for the bond investment purchased on September 1, YR01. Your solution should cover through the interest payment to be received on February 1, YR03. Bond discount or premium is amortized using the effective-interest method of amortization.arrow_forwardRantzow-Lear Company buys and sells debt securities expecting to earn profits on short-term differences in price, and holds these investments in its trading portfolio. The company’s fiscal year ends on December 31. The following selected transactions relating to Rantzow-Lear’s trading account occurred during December 2021 and the first week of 2022. 2021 Dec. 17 Purchased 180 Grocers’ Supply Corporation bonds at par for $450,000. 28 Received interest of $5,200 from the Grocers’ Supply Corporation bonds. 31 Recorded any necessary adjusting entry relating to the Grocers’ Supply Corporation bonds. The market price of the bond was $3,000 per bond. 2022 Jan. 5 Sold the Grocers' Supply Corporation bonds for $513,000. Required:1. Prepare the appropriate journal entry or entries for each transaction.2. Indicate any amounts that Rantzow-Lear Company would report in its 2021 balance sheet and income statement as a result of this investment.arrow_forward
- A company sold a $1,000,000 issue of bonds with a 15-year life, paying 4% interest per year. The bonds were sold at par value. If the company paid a selling fee of $50,000 and has an annual expense of $70,256 for mailing and record keeping, what is the true rate of interest that the company is paying for the borrowed money?arrow_forwardRantzow-Lear Company buys and sells debt securities expecting to earn profits on short-term differences in price, and holds these investments in its trading portfolio. The company’s fiscal year ends on December 31. The following selected transactions relating to Rantzow-Lear’s trading account occurred during December 2024 and the first week of 2025. December 17, 2024 Purchased 195 Grocers’ Supply Corporation bonds at par for $487,500. December 28, 2024 Received interest of $5,800 from the Grocers’ Supply Corporation bonds. December 31, 2024 Recorded any necessary adjusting entry relating to the Grocers’ Supply Corporation bonds. The market price of the bond was $3,000 per bond. January 5, 2025 Sold the Grocers' Supply Corporation bonds for $546,000. Prepare the appropriate journal entry or entries for each transaction. Indicate any amounts that Rantzow-Lear Company would report in its 2024 balance sheet and income statement as a result of this investment. Ignore income…arrow_forward1. In January 2028. Interesado Bank reported a net income of P500,000, net of debt securities trading loss of P100,000. In February 2028, the bank reported the following gross receipts: Interest income with maturity more than 5 year 400,000Leasehold income 300,000How much is the gross receipts tax on the collections of Interesado for February 2028? 2. Macmod sold 2,000 shares of his investment in stock eCare. The sale is made through the Philippine Stock Exchange (PSE) tor P1,000,000. How much is the percentage tax if Macmod acquired the shares of stock for P800,000 3. Macmod sold 2,000 shares of his investment in stock eCare. The sale is made through the Philippine Stock Exchange (PSE) tor P1,000,000. How much is the percentage tax if Macmod acquired the shares of stock for P800,000arrow_forward
- Provide solutions On January 1, 20x1, Dagul Co. acquired 10%, ₱4,000,000 bonds for ₱3,807,853. The principal is due on January 1, 20x4 but interest is due annually starting December 31, 20x1. The yield rate on the bonds is 12%. On July, 1 20x1, Dagul Co. changed its business model. It was ascertained that the investment in bonds at amortized cost should be reclassified to held for trading securities on reclassification date. The bonds were quoted at 102, 103 and 104 on July 1, 20x1, December 31, 20x1 and January 1, 20x2, respectively. How much is the gain (loss) on reclassification on January 1, 20x2? a. 243,676 b. 295,205 c. 255,205 d. 0arrow_forwardSaverin, Inc. produces and sells outdoor equipment. On July 1, 2016, Saverin, Inc. issued 62,500,000 of 10-year, 9% bonds at a market (effective) interest rate of 8%, receiving cash of 66,747,178. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year. Instructions 1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds. 2. Journalize the entries to record the following: a. The first semiannual interest payment on December 31, 2016, and the amortization of the bond premium, using the interest method. (Round to the nearest dollar.) b. The interest payment on June 30, 2017, and the amortization of the bond premium, using the interest method. (Round to the nearest dollar.) 3. Determine the total interest expense for 2016.arrow_forwardWhirlie Inc. issued $300,000 face value, 10% paid annually, 10-year bonds for $319,251 when the market of interest was 9%. The company uses the effective-interest method of amortization. At the end of the year, the company will record ________. A. a credit to cash for $28,733 B. a debit to interest expense for $31,267 C. a debit to Discount on Bonds Payable for $1,267 D. a debit to Premium on Bonds Payable for $1.267arrow_forward
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningIntermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning
- Principles of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax CollegeFinancial AccountingAccountingISBN:9781305088436Author:Carl Warren, Jim Reeve, Jonathan DuchacPublisher:Cengage Learning