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17 March, 08:55

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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  1. 17 March, 09:10
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    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
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