A1310 Bond Issued Between Interest Dates Randy Corp issued 2

A13-10 Bond Issued Between Interest Dates: Randy Corp. issued $200,000 of 7.6% (payable each 28 February and 31 August), 4-year bonds. The bonds were dated 1 March 20X4, and mature on 28 February 20X8. The bonds were issued (to yield 8%) on 30 September 20X4, for appropriate proceeds plus accrued interest. The accounting period ends on 31 December. Required: 1. Calculate the present value of the bond first assuming that it was issued on an interest date, 1 March 20X4. 2. Prepare an amortization schedule using the effective interest method of amortization. 3. Calculate the proceeds of the bond reflecting the fact that it was actually issued on 30 September 20 x4. Also calculate the accrued interest. 4. Give entries from the 30 September 20X4 date of issuance through 28 February 20XS. Base amortization on 2) above. Credit the accrued interest collected on 30 September 20X4 to interest payable in the initial journal entry

Solution

1.

present vlaue of bond= bond price= 197306.90

2. Amortisation schedule:

3.

4.

	Particulars	Cash flow	Discount factor	Discounted cash flow
	Interest payments-Annuity (4%,8 periods)	7,600.0	6.7327	51,168.86
	Principle payments -Present value (4%,8 periods)	2,00,000	0.7307	1,46,138.04
A	Bond price			1,97,306.90
	Face value			2,00,000
	Premium/(Discount)			-2,693.10
	Interest amount:
	Face value	2,00,000
	Coupon/stated Rate of interest	7.60%
	Frequency of payment(once in)	6 months
B	Interest amount	200000*0.076*6/12=		7600
	Present value calculation:
	yield to maturity/Effective rate	8.00%
	Effective interest per period(i)	0.08*6/12=		4.00%
	Number of periods:
Ref	Particulars	Amount
a	Number of interest payments in a year	2
b	Years to maturiy	4
c=a*b	Number of periods	8