International Foods issued 10% bonds, dated January 1, with a face amount of $140 million on January 1, year 1. The bonds mature on December 31, after 15 years. The market rate of interest for similar issues was 8%. Interest is paid annually on December 31. International uses the effective interest method.
Required:
1. Determine the price of the bonds at January 1, year 1.
2. Prepare the journal entry to record their issuance by International Foods on January 1, year 1.
3. Prepare the amortization schedule for bond’s duration
4. Prepare the journal entry to record interest on December 31, year 7.
| Coupon Rate per period | 10% | ||||
| Period | 15 | ||||
| Effective/Market rate per period | 8.0% | ||||
| Bond amount | $140,000,000 | ||||
| Period | Cashflows | Present value | Calculation | ||
| 1 | $14,000,000 | $12,962,963 | (14000000/(1+0.08)^1) | ||
| 2 | $14,000,000 | $12,002,743 | (14000000/(1+0.08)^2) | ||
| 3 | $14,000,000 | $11,113,651 | (14000000/(1+0.08)^3) | ||
| 4 | $14,000,000 | $10,290,418 | (14000000/(1+0.08)^4) | ||
| 5 | $14,000,000 | $9,528,165 | (14000000/(1+0.08)^5) | ||
| 6 | $14,000,000 | $8,822,375 | (14000000/(1+0.08)^6) | ||
| 7 | $14,000,000 | $8,168,866 | (14000000/(1+0.08)^7) | ||
| 8 | $14,000,000 | $7,563,764 | (14000000/(1+0.08)^8) | ||
| 9 | $14,000,000 | $7,003,486 | (14000000/(1+0.08)^9) | ||
| 10 | $14,000,000 | $6,484,709 | (14000000/(1+0.08)^10) | ||
| 11 | $14,000,000 | $6,004,360 | (14000000/(1+0.08)^11) | ||
| 12 | $14,000,000 | $5,559,593 | (14000000/(1+0.08)^12) | ||
| 13 | $14,000,000 | $5,147,771 | (14000000/(1+0.08)^13) | ||
| 14 | $14,000,000 | $4,766,455 | (14000000/(1+0.08)^14) | ||
| 15 | $154,000,000 | $48,547,223 | (154000000/(1+0.08)^15) | ||
| $163,966,540 | |||||
| 1 | Selling price of bonds at Jan 1, Year | $163,966,540 | |||
| 2 | Account titles and explanation | Debit | Credit | ||
| Cash | $163,966,540 | ||||
| Premium on issue of bonds | $23,966,540 | ||||
| Bonds payable | $140,000,000 | ||||
| (Bonds issued at premium) | |||||
| Amortization Schedule | |||||
| Period | Cash paid | Interest | Closing bal. | ||
| 0 | 0 | $0 | $163,966,540 | ||
| 1 | $14,000,000 | $13,117,323 | $163,083,864 | ||
| 2 | $14,000,000 | $13,046,709 | $162,130,573 | ||
| 3 | $14,000,000 | $12,970,446 | $161,101,018 | ||
| 4 | $14,000,000 | $12,888,081 | $159,989,100 | ||
| 5 | $14,000,000 | $12,799,128 | $158,788,228 | ||
| 6 | $14,000,000 | $12,703,058 | $157,491,286 | ||
| 7 | $14,000,000 | $12,599,303 | $156,090,589 | ||
| 8 | $14,000,000 | $12,487,247 | $154,577,836 | ||
| 9 | $14,000,000 | $12,366,227 | $152,944,063 | ||
| 10 | $14,000,000 | $12,235,525 | $151,179,588 | ||
| 11 | $14,000,000 | $12,094,367 | $149,273,955 | ||
| 12 | $14,000,000 | $11,941,916 | $147,215,872 | ||
| 13 | $14,000,000 | $11,777,270 | $144,993,141 | ||
| 14 | $14,000,000 | $11,599,451 | $142,592,593 | ||
| 15 | $154,000,000 | $11,407,407 | $0 | ||
| 4 | Interest expense | $12,599,303 | |||
| Premium on issue of bond | $1,400,697 | ||||
| Cash | $14,000,000 | ||||
| (entry for year 7) | |||||
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