Question

Veltman Corp issued $400,000 8% 10 year bonds payable at 1.15 on May 31, 2017. Market rate on the date of issuance was 6% interest is paid semiannually on November 30 and May 31. REQUIRED:

1. Make the journal entry to record the issuance
2. Make the journal entry to record the first interest payment and amortization of bond premium/discount using the effective interest method.
3. Present the beginning balance and information for the first two interest payments on the bond amortization table below.
4. How would the bonds be presented on the financial statements? What statement and what section?

Answer 1

Semiannual coupon = $ 400,000 x 8 % x 1/2 = $ 16,000

N = 10 x 2 = 20

i = 6 % x 1/2 = 3 %

PVA 3 %, n=20 = [ { 1 - ( 1 / 1.03 ) 20 } / 0.03 ] = 14.8775

PV 3%, n=20 = ( 1 / 0.03 ) 20 = 0.5537

Issue price of the bonds = 16,000 * 14.8775 + 400,000 * 0.5537 = 238,040 + 221,480 = 459,520

	Date	Account Titles	Debit	Credit
			$	$
A	May 31, 2017	Cash	459,520
		Premium on Bonds Payable		59,520
		Bonds Payable		400,000
B	Nov 30, 2017	Interest Expense	13,786
		Premium on Bonds Payable	2,214
		Cash		16,000

C.

Date	Amount Paid	Interest Expense	Premium Amortized	Bond Carrying Value
May 31, 2017				459,520
Nov 30, 2017	16,000	13,786	2,214	457,306
May 31, 2018	16,000	13,719	2,281	455,025

D. The bonds would be presented on the balance sheet under long term liabilities.