1. Calculate the issue price of the bond.
To calculate the issue price of the bond, we need to determine the present value of the bond's cash flows. The bond has a face value of $160,000, a coupon rate of 4%, semiannual coupon payments, a maturity of 4 years, and a market interest rate of 6%.
Using the present value of an ordinary annuity table (Table 14A.2), the factor for a 4-year bond at a 3% semiannual interest rate is 3.4651.
Present value of coupon payments = (Coupon payment) × (Present value factor)
Present value of coupon payments = ($160,000 × 4% / 2) × 3.4651 = $5,504.32
Using the present value of a single sum table (Table 14A.1), the factor for a 4-year bond at a 3% semiannual interest rate is 0.8227.
Present value of the face value = (Face value) × (Present value factor)
Present value of the face value = $160,000 × 0.8227 = $131,632
Issue price of the bond = Present value of coupon payments + Present value of the face value
Issue price of the bond = $5,504.32 + $131,632 = $137,136.32 (rounded to $137,136)
2. Prepare a general journal entry to record the issuance of the bonds.
The journal entry to record the issuance of the bonds would be:
Date Account Debit Credit
Jan 1, 2020 Cash $137,136
Bonds Payable $137,136
3. Determine the total bond interest expense that will be recognized over the life of these bonds.
The total bond interest expense over the life of the bonds can be calculated by subtracting the face value from the issue price:
Total bond interest expense = Issue price - Face value
Total bond interest expense = $137,136 - $160,000 = -$22,864 (rounded to -$22,864)
Note: The negative value indicates a discount on the bond.
4. Prepare the first two years of an amortization table based on the effective interest method.
Using the effective interest method, the bond discount is amortized over the life of the bond. Here's the amortization table for the first two years:
Period Ending Cash Interest Period Interest Discount Paid Expense Amort. Unamortized Discount Carrying Value
Jan 1/20 $22,864 $22,864 $114,272
June 30/20 $2,740 $2,740 $20,124 $94,536
Dec 31/20 $22,864 $22,864 $71,672
June 30/21 $2,740 $2,740 $19,124 $51,660
Dec 31/21 $22,864 $22,864 $28,796
5. Present the journal entries Banjo would make to record the first two interest payments.
The journal entries to record the first two interest payments would be:
Date Account Debit Credit
June 30, 2020 Bond Interest Expense $2,740
Discount on Bonds Payable $2,740
Date Account Debit Credit
December 31, 2020 Bond Interest Expense $2,740
Discount on Bonds Payable $2,740