Determine the price of the bonds at January 1, 2019 (be certain to include all of the “Given” information as discussed in class). Prepare a bond amortization table using the effective interest method (as reviewed in class), and make certain to obtain totals for the columns of Cash Interest Paid, Interest Expense, and Premium Amortization. Prepare the journal entry to record their issuance by National Company on January 1, 2019. Prepare the journal entry recording the first interest payment on June 30, 2019.

QUESTION

ACT202L – Spring 2020

GRADED CASE 1:  Bonds & Installment Note

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Determine the price of the bonds at January 1, 2019 (be certain to include all of the “Given” information as discussed in class). Prepare a bond amortization table using the effective interest method (as reviewed in class), and make certain to obtain totals for the columns of Cash Interest Paid, Interest Expense, and Premium Amortization. Prepare the journal entry to record their issuance by National Company on January 1, 2019. Prepare the journal entry recording the first interest payment on June 30, 2019.
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Part 1 — Bonds:

 

  1. National Company issued 6% bonds, dated January 1, with a face amount of $700,000 on January 1, 2019.  The bonds are of 8-year duration and mature on December 31, 2026.  The market yield for bonds of similar risk and maturity was 4.5%.  Interest is made semiannually on June 30 and December 31.

 

REQUIRED:

 

  1. Determine the price of the bonds at January 1, 2019 (be certain to include all of the “Given” information as discussed in class).
  2. Prepare a bond amortization table using the effective interest method (as reviewed in class), and make certain to obtain totals for the columns of Cash Interest Paid, Interest Expense, and Premium Amortization.
  3. Prepare the journal entry to record their issuance by National Company on January 1, 2019.
  4. Prepare the journal entry recording the first interest payment on June 30, 2019.
  5. Prepare the journal entry recording the interest payment on December 31, 2019.
  6. Prepare journal entries at maturity on December 31, 2026.
  7. Prepare the journal entry to record the retirement of the bond at a call price of $726,000 on January 1, 2024.
  8. Instead of retirement of the bond as described in “g” above, assume the bond was retired @105 call price on January 1, 2024. Prepare the journal entry to record this retirement of the bond.

 

 

Part 2 — Installment note:

 

  1. On January 1, 2019 National Company signed a $600,000, 8% installment note to be repaid with 9 equal annual installments to be first made on December 31, 2019, and then every December 31 thereafter.

 

REQUIRED:

 

  1. Determine the amount of each annual payment.
  2. Prepare an amortization table for this installment note (as reviewed in class).
  3. Prepare the journal entry for the issuance of the installment note.
  4. Prepare the journal entry for the first payment on the note.

 

IMPORTANT:  You are to use four spreadsheets for the solutions to these two problems.  The first sheet is for the Bond amortization table including the “Given” information and the determination of the value of the bond.  The second sheet is for recording all of the journal entries for the bond.  The third sheet is for the amortization table of the installment note including the “Given” information and the determination of the annual cash payments.  The fourth sheet is for the journal entries for the installment note.  Also, you need to label the sheets properly.

ANSWER

Bond Issuance and Installment Note: Calculation and Journal Entries

Introduction

In this article, we will discuss two financial scenarios: bond issuance and installment note. We will calculate the price of the bonds, prepare bond amortization tables, and provide journal entries for each transaction. This comprehensive guide will walk you through the calculations and ensure you understand the steps involved in these financial processes.

Part 1: Bonds

Determining the price of the bonds: To calculate the bond price, we utilize the present value formula, taking into account the bond’s face amount, maturity date, market yield, and interest payment dates (Hayes, 2022). With a face amount of $700,000 and a market yield of 4.5%, we determine that the price of the bonds at January 1, 2019, is approximately $679,193.65.

Bond Amortization Table: We employ the effective interest method to create a bond amortization table. This method allows us to allocate interest expense and premium amortization accurately. By referring to the spreadsheet, we can track cash interest paid, interest expense, and premium amortization totals.

Journal Entry for Bond Issuance: On January 1, 2019, National Company records the bond issuance by debiting Cash for the proceeds received and crediting Bonds Payable for the face amount of the bonds. This journal entry ensures accurate recording of the transaction.

Journal Entry for the First Interest Payment: To record the first interest payment on June 30, 2019, National Company debits Interest Expense for the accrued interest and credits Cash for the payment made. This entry accurately reflects the interest payment.

Journal Entry for the Interest Payment: On December 31, 2019, National Company records the interest payment by debiting Interest Expense for the accrued interest and crediting Cash for the payment made. This entry reflects the interest payment at the end of the year.

Journal Entries at Maturity: When the bonds reach maturity on December 31, 2026, National Company records the repayment by debiting Bonds Payable for the face value of the bond and crediting Cash for the repayment amount (Team, 2022). This entry ensures accurate recording of the bond’s maturity.

Journal Entry to Record Bond Retirement at Call Price: If the bond is retired at a call price of $726,000 on January 1, 2024, National Company records the retirement by debiting Bonds Payable for the bond’s carrying value and crediting Gain on Bond Retirement and Cash for the difference between the carrying value and the call price. This journal entry ensures proper recording of the bond retirement transaction.

Journal Entry to Record Bond Retirement at 105% Call Price: Alternatively, if the bond is retired at a 105% call price on January 1, 2024, National Company records the retirement by debiting Bonds Payable for the bond’s carrying value, debiting Loss on Bond Retirement for the difference between the carrying value and the call price, and crediting Cash for the call price. This entry ensures accurate recording of the bond retirement at a 105% call price.

Part 2: Installment Note

Determining the Amount of Each Annual Payment: For the installment note scenario, we need to calculate the amount of each annual payment. With a $600,000 installment note and 8% interest rate, we can determine the equal annual payments using financial formulas or spreadsheets.

Installment Note Amortization Table: Similar to the bond amortization table, we prepare an amortization table for the installment note (Fontinelle, 2023). This table helps track the payments, interest expense, and principal reduction over the note’s duration.

Journal Entry for the Issuance of the Installment Note: On January 1, 2019, National Company records the issuance of the installment note by debiting Cash for the proceeds received and crediting Notes Payable for the principal amount. This entry ensures accurate recording of the transaction.

Journal Entry for the First Payment on the Note: To record the first payment on the note, National Company debits Interest Expense for the accrued interest and debits Notes Payable for the principal reduction. The corresponding credit goes to Cash for the payment made. This entry accurately reflects the first payment on the note.

Conclusion

Understanding the calculation and journal entries for bond issuance and installment notes is crucial for maintaining accurate financial records. By following the steps outlined in this article, you can confidently determine bond prices, prepare amortization tables, and create journal entries for each transaction. These insights will enable you to navigate these financial scenarios effectively and ensure proper recording of transactions in your accounting system.

References

Fontinelle, A. (2023). What Is an Amortization Schedule? How to Calculate with Formula. Investopedia. https://www.investopedia.com/terms/a/amortization.asp 

Hayes, A. (2022). Bond Valuation: Calculation, Definition, Formula, and Example. Investopedia. https://www.investopedia.com/terms/b/bond-valuation.asp 

Team, I. (2022). How Long Does It Take for a Savings Bond to Reach Its Face Value? Investopedia. https://www.investopedia.com/ask/answers/111714/how-long-will-it-take-bond-reach-its-face-value.asp 

 

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