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sashaice
1 month ago
14

On January 1, 2019, Shields, Inc., issued $800,000 of 9%, 20-year bonds for $879,172, yielding a market (yield) rate of 8%. Semi

annual interest is payable on June 30 and December 31 of each year. a. Show computations to confirm the bond issue price. b. Prepare journal entries to record the bond issuance, semiannual interest payment and premiun E9-46. amortization on June 30, 2016, and semiannual interest payment and premium amortization on December 31, 2016. Use the effective interest rate method. c. Post the journal entries from part b to their respective T-accounts. d. Record each of the transactions from part b in the financial statement effects template.
Business
1 answer:
soldi70 [3.6K]1 month ago
6 0

Response:

cash 879,172 debit

   bonds payable   800,000 credit

   premium on BP    79,127 credit

--to register issuance--

Interest expense 35,166.84 debit

premium on BP      833.16 debit

cash                    36,000 credit

--to register first interest payment--

Interest expense 35133.52 debit

premium on BP          866.48 debit

cash                       36,000 credit

--to register second interest payment--

Impact on Financial Statements:

Cash flow:

financing:

proceeds from bonds 879,172

interest paid                 72,000

Net income

interest expense 35,133.52 + 35,166.84 = 70.250,36

Balance sheet

Bonds payable   800,000

Premium on Bonds 77,471

Clarification:

The valuation will be determined by discounting future cash flows at the market rate

C \times \frac{1-(1+r)^{-time} }{rate} = PV\\

C 36,000.000 (800,000 x 9% x 1/2)

duration 40 (20 years x 2)

rate 0.04 (8% x 1/2)

36000 \times \frac{1-(1+0.04)^{-40} }{0.04} = PV\\

PV $712,539.8598

\frac{Maturity}{(1 + rate)^{time} } = PV  

Maturity   800,000.00

duration   40.00

rate  0.04

\frac{800000}{(1 + 0.04)^{40} } = PV  

PV   166,631.24

PV c $712,539.8598

PV m  $166,631.2357

Total $879,171.0955

The interest expense is computed as the carrying amount times the market interest rate

the cash amount will remain equal for every period:

principal x coupon rate x half-year for semiannual payments.

800,000 x 0.09 x 1/2 = 36,000

The variance in each will dictate the amortization of the premium

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