Question

# On January 1, 2018, Cod Fisheries sold \$100,000 (face value) of bonds. The bonds are dated...

On January 1, 2018, Cod Fisheries sold \$100,000 (face value) of bonds. The bonds are dated January 1, 2018, and will mature on January 1, 2023. Interest is to be paid annually on January 1. The following amortization schedule was prepared for the first two years of the bond’s life:

 Date Interest payment Interest expense Amortization Book value of bond 1/1/18 \$104,212.37 1/1/19 \$ 7,000 \$ 6,252.74 \$ 747.26 103,465.11 1/1/20 7,000 6,207.91 792.09 102,673.02

Required:

1. What is the coupon rate for this bond issue?
2. What is the effective interest rate for this bond issue?
3. Prepare the journal entry to record the sale of the bond on January 1, 2018.
4. Identify the amount of interest expense to be reported on the income statement for the year ended December 31, 2020.
5. What is the bond’s book value at December 31, 2021?

a) Coupon rate = 7000/100000 = 7%

b) Effective interest rate = 6252.74/104212.37 = 6%

c) Journal entry

 date account and explanation Debit Credit 1/1/18 Cash 104212.37 Bonds payable 100000 Premium on bonds payable 4212.37

d) Interest expense on December 31,2020 = 102673.02*6% = 6160.38

Premium amortization = 7000-6160.38 = 839.62

e) Interest expense on December 31,2021 = 101833.40*6% = 6110.00

Premium amortization = 7000-6110 = 890

Bond's book value at December 31,2021 = 101833.40-890 = 100943.40

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