Question

On January 1, 2018, Ellison Co. issued six-year bonds with a face value of $400,000,000 and a stated interest rate of 7%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%.

a. The issue price of the bonds is

b. Prepare the journal entry for issuance

c. Prepare the interest journal entries for years 1 through 6 including maturity

Answer 1

Calculation of Bond Price

Period	Cashflow	PV Factor @ 4%	Present value
1	$         14,000,000	0.96154	$   13,461,560
2	$         14,000,000	0.92456	$   12,943,840
3	$         14,000,000	0.889	$   12,446,000
4	$         14,000,000	0.8548	$   11,967,200
5	$         14,000,000	0.82193	$   11,507,020
6	$         14,000,000	0.79031	$   11,064,340
7	$         14,000,000	0.75992	$   10,638,880
8	$         14,000,000	0.73069	$   10,229,660
9	$         14,000,000	0.70259	$     9,836,260
10	$         14,000,000	0.67556	$     9,457,840
11	$         14,000,000	0.64958	$     9,094,120
12	$         14,000,000	0.6246	$     8,744,400
12	$       400,000,000	0.6246	$ 249,840,000
Bond Issue Price			$ 381,231,120

Semi Annual Interest on Bond	=	400000000 x 7% /2
Semi Annual Interest on Bond	=	$              14,000,000

Face Value	=	$           400,000,000
Bond Issue Price	=	$           381,231,120
Discount on Issue of bond	=	$             18,768,880

2.

Date	Account Description	Debit	Credit
1-Jan-18	Cash	$       381,231,120
	Discount on Issue of Bond	$         18,768,880
	Bond Payable		$ 400,000,000
	(To Record Issue of Bond)

3.

Amortization Table

Period	Cash flow	Interest @ 4%	Discount Amortization	Bond Payable
0				$ 381,231,120.00
1	$       14,000,000	$ 15,249,245.00	$   1,249,245.00	$ 382,480,365.00
2	$       14,000,000	$ 15,299,215.00	$   1,299,215.00	$ 383,779,580.00
3	$       14,000,000	$ 15,351,183.00	$   1,351,183.00	$ 385,130,763.00
4	$       14,000,000	$ 15,405,231.00	$   1,405,231.00	$ 386,535,994.00
5	$       14,000,000	$ 15,461,440.00	$   1,461,440.00	$ 387,997,434.00
6	$       14,000,000	$ 15,519,897.00	$   1,519,897.00	$ 389,517,331.00
7	$       14,000,000	$ 15,580,693.00	$   1,580,693.00	$ 391,098,024.00
8	$       14,000,000	$ 15,643,921.00	$   1,643,921.00	$ 392,741,945.00
9	$       14,000,000	$ 15,709,678.00	$   1,709,678.00	$ 394,451,623.00
10	$       14,000,000	$ 15,778,065.00	$   1,778,065.00	$ 396,229,688.00
11	$       14,000,000	$ 15,849,188.00	$   1,849,188.00	$ 398,078,876.00
12	$       14,000,000	$ 15,921,124.00	$   1,921,124.00	$ 400,000,000.00
12	$    400,000,000	$                       -	$                       -	$                         -

Journal ENtry

Date	Account Description	Debit	Credit
30-Jun	Interest Expenses	$   15,249,245.00
	Discount on Issue of Bond		$ 1,249,245.00
	Cash		$    14,000,000
31-Dec	Interest Expenses	$   15,299,215.00
	Discount on Issue of Bond		$ 1,299,215.00
	Cash		$    14,000,000
30-Jun	Interest Expenses	$   15,351,183.00
	Discount on Issue of Bond		$ 1,351,183.00
	Cash		$    14,000,000
31-Dec	Interest Expenses	$   15,405,231.00
	Discount on Issue of Bond		$ 1,405,231.00
	Cash		$    14,000,000
30-Jun	Interest Expenses	$   15,461,440.00
	Discount on Issue of Bond		$ 1,461,440.00
	Cash		$    14,000,000
31-Dec	Interest Expenses	$   15,519,897.00
	Discount on Issue of Bond		$ 1,519,897.00
	Cash		$    14,000,000
30-Jun	Interest Expenses	$   15,580,693.00
	Discount on Issue of Bond		$ 1,580,693.00
	Cash		$    14,000,000
31-Dec	Interest Expenses	$   15,643,921.00
	Discount on Issue of Bond		$ 1,643,921.00
	Cash		$    14,000,000
30-Jun	Interest Expenses	$   15,709,678.00
	Discount on Issue of Bond		$ 1,709,678.00
	Cash		$    14,000,000
31-Dec	Interest Expenses	$   15,778,065.00
	Discount on Issue of Bond		$ 1,778,065.00
	Cash		$    14,000,000
30-Jun	Interest Expenses	$   15,849,188.00
	Discount on Issue of Bond		$ 1,849,188.00
	Cash		$    14,000,000
31-Dec	Interest Expenses	$   15,921,124.00
	Bond Payable	$ 400,000,000.00
	Discount on Issue of Bond		$ 1,921,124.00
	Cash		$ 414,000,000