Winter 2015
On January 1, 2014 Company A negotiated a 5-year bond with a maturity value of $600,000. The bond will pay
interest at a rate of 6.0% per annum payable June 30th and December 31st of each year. When the bond was
issued, the market rate (bond yield) was 8%.
NOTE: Present value tables can be found at the back of this exam (second last page)
Required
1.
Calculate the proceeds received when the bond is issued. Round your answer to 2 decimal places. (4
marks)
2.
Prepare the journal entry to record the issuance of the bond. (2 marks)
3.
Using the effective interest rate method, prepare journal entries at June 30 th and December 31st for 2014.
(4 marks)
Solution
1.
Principle 600,000 x 0.6756 = $405,360 (2 marks)
Interest = 600,000 x 6% x 6/12 x 8.1109 = 145,996.20 (2 marks)
Total = 405,360+145,996.20 = 551,356.20
2.
Cash
Discount on Bond Payable
Bonds Payable
OR
Cash
Bonds payable
3.
551,356.20 (1 mark)
48,643.80 (1/2 mark)
600,000 (1/2 mark)
551,356.20 (1 mark)
551,356.20 (1 mark)
Interest expense (551,356.20 x 8% x 6/12)
22,054.25 (1 mark)
Discount on Bond Payable (or Bond payable)
forward)
Cash (600,000 x 6% coupon rate x 6/12)
4,054.25 (1/2 mark, carry
18,000.00 (1/2 mark)
Interest expense ((551,356.20+4,054.25)x8% x 6/12) 22,216.42 (1 mark, carry forward)
Discount on Bond Payable (or Bond payable)
forward)
Cash
Date
Face Value
Bond Premim
Start
Int expense
Carrying
value x 8%
4,216.42 (1/2 mark, carry
18,000.00 (1 mark)
Int Paid Face
value x 6%
coupon rate
x 6/12
Bond
premium
ending
Carrying
Value
Ending
market rate x
6/12
Jan 1
600,000
48,643.80
551,356.20
Jan 1 -June
30
600,000
48,643.80
22,054.25
18,000
44,588.75
555411.25
July 1 - Dec.
31
600,000
44,588.75
22216.42
18000
40,372.33
559627.67
Winter 2019
Barley Company issued bonds with the following provisions:
Maturity value: $100,000.
Interest: 10 percent per annum payable semi-annually each September 30 and March 31.
Terms: Bonds dated April 1, 2016 and will mature 5 years from that date.
The company’s fiscal year ends on December 31. The bonds were sold (issued) to investors on April 1,
2016 at a market rate of 6 percent. The company uses the effective interest method to amortize bond
discounts or premiums.
Required:
(Note: Round your answers to 2 decimal places where necessary).
a. Is this premium or a discount bond? _____premium________________________ (1 mark)
b. Compute the issue (sale) price of the bonds. (4 marks)
Principal: 100,000 x PV Single Amount i=3%,n=10 = 100,000 x 0.7441= 74,410
1 mark
Interest:100,000 x 10% x 6/12 x PV Annuity i=3%, n=10 = 5,000 x 8.5302 = 42,651
2 marks
Total proceeds = 117,061
1 mark
c. Prepare the journal entry to record the issuance of the bonds. (2 marks)
Cash
Bonds payable
Premium on bonds payable
Under ASPE
117,061
100,000
17,061
1 mark
0.5 marks
0.5 marks
OR
Cash
Bonds payable
Under IFRS
117,061
117,061
1 mark
1 mark
d. Prepare the journal entries required on the following dates: (10 marks)
i) September 30, 2016
Interest expense (117,061x6% x 6/12)
3511.83
1 mark
Premium on bonds payable
Cash (100,000 x 10% x 6/12)
Under ASPE
OR
Interest expense (117,061x6%x6/12 )
Bonds payable
Cash
Under IFRS
1488.17
5,000
1 mark
1 mark
5,000
1 mark
1 mark
1 mark
3511.83
1488.17
ii) December 31, 2016
Interest expense (117061-1488.17)x6% x 3/12 months 1733.59
1 mark
Premium on bonds payable
1 mark
766.41
Interest payable
2500
1 mark
Under ASPE
Interest expense
Bond payable
1,733.59
1 mark
766.41
1 mark
Interest payable
2,500
1 mark
5,000
1 mark
1 mark
1 mark
1 mark
5,000
1 mark
1 mark
1 mark
1 mark
Under IFRS
iii) March 31, 2017
Interest payable
2,500
Interest expense
1733.59
Premium on bonds payable 766.41
Cash
Under ASPE
OR
Interest payable
Interest expense
Bonds payable
Cash
Under IFRS
2,500
1733.59
766.41
Apr 1
117,061
Sept 30 prem amort
(1488.17)
Sept 30 CV
115572.83
Dec 31 prem amort
Dec 31 CV
Mar 31 prem amort
Mar 31 CV
(766.41)
114806.42
(766.41)
114040.01