Accounting-Bonds?

Question

Moresby, Inc produces & sells voltage regulators. On july 1, 2002 Moresby Inc issued $8,000,000 of ten-year. 11% bonds at an effective interest rate of 10%. Interest on the bonds is payable semiannually on Dec 31 & June 30. Fiscal year for company is the calendar year.
Instructions
1. Journalize the entry to record the amount of the cash proceeds from the sale of the bonds. (How to set up table & compute cash proceeds?)
2. Journalize the entries to record the following
a. First semiannual interest payment on Dec 31, 2002, including the amortization of the bond premium, using straight-line method
b. The interest payment on June 30, 2003 & the amortization of the bond premium, using staright-line method.
3. Determine the total interest expense for 2002.
4. Will the bond proceeds always be greater than the face amount of the bonds when the contract rate is greater than the market rate of interest? Explain.

Answer 1

1. Journalize the entry to record the amount of the cash proceeds from the sale of the bonds. (How to set up table & compute cash proceeds?)
The coupon or stated interest rate is 11%. The yield or market rate is 10%. The symbols you need to know are:
(pv 1, i, n) = present value of $1 discounted at i%, n periods from the present
(pva, i, n) = present value of an annuity of $1 discounted at i%, for n periods.

The price of the bond is computed as:
$8,000,000(pv1, 5%, 20)+11%(1/2)(8,000,000)(pva, 5%, 20)

In this problem, the bonds pay interest every 6 mths. Therefore one-half the yield rate is used for discounting over 20 discounting periods (bond has a 10-yr term). Using the present value table available at the 1st link, the bond price is:
8,000,000(0.3769) + 11%(1/2)(8,000,000)(12.4622) =
3,015,200 + 5,483,368 = 8,498,568.

Journal entry:
Dr Cash 8,498,568
Cr Bond premium 498,568
Cr Bond payable 8,000,000

2. Journalize the entries to record the following
a. First semiannual interest payment on Dec 31, 2002, including the amortization of the bond premium, using straight-line method
If the straight-line method is used, the interest journal entries are the same every time. You amortize the bond premium of $498,568 equally over 20 interest periods.
Journal entry:
Dr Bond interest 415,071.60
Dr Bond premium 24,928.40
Cr Cash 440,000.00

b. The interest payment on June 30, 2003 & the amortization of the bond premium, using staright-line method.
Dr Bond interest 415,071.60
Dr Bond premium 24,928.40
Cr Cash 440,000.00

3. Determine the total interest expense for 2002.
Since the bond was issued on July 1, 2002 and the fiscal yr is the calendar yr, in 2002 there would be only 1 interest payment, on Dec 31, 2002. Interest was $415,071.60.

4. Will the bond proceeds always be greater than the face amount of the bonds when the contract rate is greater than the market rate of interest? Explain.
Yes. When the bonds were issued, competing bonds of similar term and risk were yielding less than the contract rate of this bond issue. The only way to equalise this is to up the price of the bond.

The lecture at the 2nd link is essential reading for students.

Note: When using the present value tables, I only used up to 4 decimal places. Results will be slightly different if you used up to 2 or 5 decimal places.

Answer 2

Face Amount Of Bond

Answer 3

u donot get paper certificate only a statment showing the amount invested, your name and adress and the file ( ref No.) that is all the proof u require ( or is given )