1. Walker Corporation issued 14%, 5-year bonds with a par value of $5,000,000 on January 1, 2010. Interest is to be paid semiannually on each June 30 and December 31. The bonds were issued at $5,368,035 cash when the market rate for this bond is 12% (a) Prepare the general journal entry to record the issuance of the bonds on January 1, 2010. (b) Show how the bonds would be reported on Walker's balance sheet at January 1, 2010. (c) Assume instead that Walker uses the straight-line method for amortizing any discount or premium on bonds. Prepare the general journal entry to record the first semiannual interest payment on June 30, 2010. (a) DR CR Jan. 1, 2010 Cash 5,368,035 Premium on Bonds Payable 368,035
Bonds Payable 5,000,000 Issued bonds at a premium on issue date. (b) Partial Balance Sheet as of Walkers Corporation Jan. 1, 2010 Long-Term Liabilities:
Bonds Payable 5,000,000 Maturity value Add: Premium on Bonds Payable 368,035 $ 5,368,035 Carrying Value (c)
Using the straight-line method, the premium amortization will be 36,803.5 every six months. 368,035/10 periods = 36,803.5
Interest: (5,000,000*0.14*0.5=350,000) DR CR June 30, 2010 Bond Interest Expense 313,196.5 Premium on Bonds Payable 36,803.5 Cash 350,000 Paid semiannual interest and amortized premium. 2. A company issues bonds with a par value of $800,000 on their issue date. The bonds mature in 5 years and pay 6% annual interest in two semiannual payments. On the issue date, the market rate of interest is 8%. Compute the price of the bonds on their issue date. Market rate of interest (8%) > contact rate of interest (6%) 1. Interest paid by the bond (semiannual): (800,000*0.06)/2 = 24,000 Semiannual rate = 4% (Market rate 8%/2)
Semiannual periods = 10 (Bond life 5 years*2)
2. The present value of the bond: Table B.1 (0.6756*800,000) = 540,480 3. Present value for interest payments: Table B.3 (8.1109*24,000) = 194,661.6 4. The price of the bonds on their issue date: Present value of the bonds + Present value of the interest payments = 540,480 + 194,661.6 = 735,141.6
3. What is a bond? Identify and discuss the different types of bonds.
Bonds are a form of debt. For example, you loan your money to a company, a city, the government – and they promise to pay you back in full, with regular interest payments. A city may sell bonds to raise money to build a bridge, while the federal government issues bonds to finance its spiraling debts The common types of Bonds:
Secured and Unsecured:
Secured bonds have specific assets of the issuer pledged as collateral. Unsecured bonds are backed by the issuer’s general credit standing. Term and Serial:
Term bonds are scheduled for maturity on one specified date. Serial bonds mature at more than one date. Registered and Bearer:
Registered bonds are issued in the names and addresses of their holders. Bearer bonds are payable to whoever holds the bond. Convertible and Callable:
Convertible bonds can be exchanged for a fixed number of common shares of the issuing corporation. Callable bonds have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity....
References: PowerPoint slide 29, 33, 34
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