Question

Tapas Inc. issued a bond on January 1, 2019 for $691,271.76. The bond matures in 15 years. Interest on the bond is payable annually on December 31. The bond had a face amount of $600,000. The coupon rate is 12%, and the market rate at the time of issuance was 10%.  

Please do the following:

Part A: This bond sold for a premium. Why would investors be willing to pay more than the face amount of this bond? (Part A is a conceptual question).

Part B : Make the accounting entry to record the interest expense and interest payment for 2019. Include all accounts that are affected (i.e., the complete recording of this transaction). Show your calculations (i.e., showing me clearly how you calculated the amount for each account that is affected). Please present your answers rounded to the nearest two decimal places.

Part C : What would interest expense be in 2020 (just interest expense, not the entire accounting entry)? Please show your calculation and round to the nearest two decimal places.

Answer 1

Answer 1)	investor is willing to pay more than the face value amount because the
	stated rate of interest of 12% is more than the market rate of interest of 10%
part B	Date	Account titles and Explanations					Debit	Credit
	6/30/2019	interest expense		(691,271.76*5%)			34563.59
		premium on bonds payable					1436.41
		cash	(600,000*12%*1/2)					36000
	12/31/2019	interest expense		(691271.76-1436.41)*5%			34491.77
		premium on bonds payable					1,508.23
		cash						36,000
part c	interest expense for 2020
	6/30/2020	(691271.76-1436.41-1508.23)*5%=					34416.36
	12/31/2020	(691271.76-1436.41-1508.23-1583.64)*5%=					34337.17
	total interest expense for 2020						68753.53	answer