Question

Serotta Corporation is planning to issue bonds with a face value of $390,000 and a coupon rate of 16 percent. The bonds mature in two years and pay interest quarterly every March 31, June 30, September 30, and December 31. All of the bonds were sold on January 1 of this year. Serotta uses the effective-interest amortization method and also uses a premium account. Assume an annual market rate of interest of 12 percent. (FV of $1, PV of $1, FVA of $1, and PVA of $1)

1. Provide the journal entry to record the issuance of the bonds January 1

2. Provide the journal entry to record the interest payment on March 31, June 30, September 30, and December 31 of this year.

3. What bonds payable amount will Serotta report on this year's December 31 balance sheet?

Answer 1

Face Value of Bonds = $390,000

Annual Coupon Rate = 16%
Quarterly Coupon Rate = 4%
Quarterly Coupon = 4% * $390,000
Quarterly Coupon = $15,600

Time to Maturity = 2 years or 8 quarters

Annual Interest Rate = 12%
Quarterly Interest Rate = 3%

Issue Value of Bonds = $15,600 * PVA of $1 (3%, 8) + $390,000 * PV of $1 (3%, 8)
Issue Value of Bonds = $15,600 * 7.01969 + $390,000 * 0.78941
Issue Value of Bonds = $417,377

Amortization table for this year:

Answer 1 and 2.

Journal entries related to this year:

Answer 3.

Company will report bonds payable of $404,497 on this year’s Balance Sheet on December 31.