Question

Houston Co. issues $100 million in bonds on January 1, 2017 to expire in 6 years. Interest is paid semi-annually on June 30 and December 31. The coupon (stated) rate and the yield are given below. Dallas Inc. purchased $1 million of the bonds (face value). Dallas Inc. classifies the bonds as available for sale.

Stated Coupon Rate= 4.5% Market Yield Rate= 4%

a.) Prepare the amortization table for the $1 million bonds purchased by Dallas Inc.

b.) Prepare the journal entry for purchase of the bonds by Dallas Inc. at the issue price.

c.) Prepare the two journal entries for the receipt of interest revenue by Dallas Inc.

d.) Assuming that the market price of the bonds is 101 on December 31, 2017, prepare the necessary journal for Dallas Inc.

Answer 1

Part a:
Bond value ($)
1000000
Year	Annual interest (1000000 x 4.5%)	Present value factor @4% pa.	Present value cash inflow
1	45000	0.9615385	43269.23077
2	45000	0.9245562	41605.02959
3	45000	0.8889964	40004.83614
4	45000	0.8548042	38466.1886
5	45000	0.8219271	36986.7198
6	45000	0.7903145	35564.15366
Principal	1000000	0.7903145	790314.5257
Value of bond			1026210.684

Part (b):
Date	Account titles and explanations	Debit ($)	Credit ($)
	4.5% Bond	1000000
	Premium on bond	26210.684
	Bank		1026210.684
	(Being bond purchased)

Workings:

Year	Annual interest (1000000 x 4.5%)	Present value factor @4% pa.	Present value cash inflow
1	45000	0.961538	43269.23
2	45000	0.924556	41605.03
3	45000	0.888996	40004.84
4	45000	0.854804	38466.19
5	45000	0.821927	36986.72
6	45000	0.790315	35564.15
Principal	1000000	0.790315	790314.5
			1026211
Less: Face value of bond			1000000
Premium on bond			26210.68

Part ©
Date	Account titles and explanations	Debit ($)	Credit ($)
Jun-30	Bank {(1000000 x 4.5%) X 6/12}	22500
	Interest received		22500
	(Being interest received)
	Interest received	22500
	Profit and loss account		22500
	(Being interest credited to profit and loss account)
Dec-31	Bank {(1000000 x 4.5%) X 6/12}	22500
	Interest received		22500
	(Being interest received)
	Interest received	22500
	Profit and loss account		22500
	(Being interest credited to profit and loss account)

Part (d):

Market value of Bond	1010000
Book value of bond	1000000
Profit on appreciation of investment (1010000 - 1000000)	10000