A137 Interest Expense On 30 September 20X1 Golf Mania Co iss

A13-7 Interest Expense On 30 September 20X1, Golf Mania Co. issued $3 million face-value dures. and mature in interest rate of 10% per annum, payable semi-annually on 31 March and 30 Septembe, y\'s fiscal year 30 September 20X11The bonds were issued at a price to yield 8%. Golf Mania September and the company uses the effective interest method. ue debentures. The bonds have a nominal years, on ends on 30 semi-annually on 31 March and 30 September, and iscal year e mature in 10 Company\'s f Required: 1. Determine the price at which the bonds were issued. 2. Prepare journal entries to record the issuance of the bonds, payment of interest, and al nd all necessary adjustments for the first two years (i.e., through 30 September 20X3). 3. Compute the amount of unamortized bond premium remaining on 1 October 20X7 ref ecting the effective value of interest method, without preparing an amortization schedule. (Note: the bonds is equal to the present value of the remaining cash flows.) At any point in time, the book 4. Calculate the amount of premium amortization, for the six months ending 31 March 20x8.

Solution

1 Issue price of bond=Present value of interest expenses+present value of repayment of bond Number of semi-annual payments=10*2=20 Interest expense=3000000*10%*1/2=150000 Yield=8%*1/2=4% Present value of interest expense for 20 semi-annual period @4%=150000*13.59033=2038549 Present value of repayment of bond at 20th semi-annual period @4%=3000000*0.456387=1369161 Issue price of bond=2038549+1369161=3407710 2 Date Account titles and explanation Debit Credit 20X1 30-Sep Cash 3407710 10% bond payable 3000000 Premium on bonds payable 407710 (Bonds iisued at premium) 20X2 31-Mar Interest expense (3407710*4%) 136308 Premium on bonds payable 13692 Cash (3000000*10%*1/2) 150000 (interest paid) 30-Sep Interest expense * (3394018*4%) 135761 Premium on bonds payable 14239 Cash (3000000*10%*1/2) 150000 (interest paid) 20X3 31-Mar Interest expense (3379779*4%) 135191 Premium on bonds payable 14809 Cash (3000000*10%*1/2) 150000 (interest paid) 30-Sep Interest expense (3364970*4%) 134599 Premium on bonds payable 15401 Cash (3000000*10%*1/2) 150000 (interest paid) * interest expense=Previous book value*Yield Previous book value= issue price (for first year) or Beginning book value-Premium amortized 3 Book value of the bond =present value of the remaining cashflows On oct 20X7,12 semi annual payments have completed Present value of ramaining cashflows: Interest payment for 8 semi-annual period @ 4%=300000*2.282069=1009912 Present value of repayment of bond at 8th semi-annual period @4%=3000000*0.73069=2192071 Book value of the bond =1009912+2192071=3201983 Unamortized premium=issue price of bond-book value of bond=3407710-3201983=205727 4 Premium amortization=Interest payment-(book value*yield)=150000-(3201983*4%)=21921