Answer:
1. Determine the price of the bonds at January 1st 2016.
face value = $240,000,000
n = 10 years x 2 = 20
coupon = $240,000,000 x 10% x 1/2 = $12,000,000
market interest = 12% x 1/2 = 6%
using an excel spreadsheet and the NPV function you can calculate the present value: 19 cash flows of 12,000,000 and one final cash flow of 252,000,000, with a dscount rate of 6%:
=NPV(6%,12000000 ...19 times,252000000) = $212,472.189
2. Prepare the journal entry to record their issuance by Ticket on January 1, 2016.
Dr Cash 212,472,189
Dr Discount on bonds payable 27,527,811
Cr Bonds payable 240,000,000
3. Prepare the journal entry to record interest on June 30, 2016 (at the effective rate).
to determine effective interest paid:
($212,472,189 x 6% x 1/2) - ($240,000,000 x 5% x 1/2) = $6,374,166 - $6,000,000 = $374,166
Dr Interest expense 6,374,166
Cr Cash 6,000,000
Cr Discount on bonds payable 374,166
4. Prepare the journal entry to record interest on December 31, 2016 (at the effective rate).
($212,846,355 x 6% x 1/2) - ($240,000,000 x 5% x 1/2) = $6,385,391 - $6,000,000 = $385,391
Dr Interest expense 6,385,391
Cr Cash 6,000,000
Cr Discount on bonds payable 385,391
Discount on bonds payable is a contra liability account that has a credit balance and reduces the value of the liability. Using the effective rate, as real interest is paid, the amount of bonds payable increases since discount on bonds payable account decreases.