Question

zz company acquired $100000 face value of the outstanding bonds of c company on january 1, 2017. the bonds pay interest semiannually on july 1 ( ist payment) and january 1 at an annual rate of 6% and mature on january 1, 2020. the bonds were priced on the market on january 1, 2017 to yield 5% compounded semi-annually. zz company classifies these bonds as held to maturity. a) compute the amount that zz company paid for these bonds, excluding commissions and taxes. b) prepare a bond amortization table. c) prepare the journal entries for the bond at issuance and for the first two contractual payments

Answer 1

Answer (a):

Face value = $100000

Maturity = 3 years

Annual rate = 6%

Semiannual payments = $100,000 * 6%/2 = $3,000

Yield required = 5%

Semiannual yield = 5%/2 = 2.5%

Using excel function PV:

PV (rate, nper, pmt, fv, type)

PV (2.5%, 6, 3000, 100000, 0)

= $102,754.06

Amount that zz company paid for these bonds, excluding commissions and taxes = $102,754.06

Answer (b):

Bond Amortization Schedule:

Answer (c):

Journal entries in books of zz company:

Journal entries in books of c company: