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28 July, 09:22

Ticket, Inc. issued 10% bonds, dated January 1, with a face amount of $240 million on January 1, 2016. The bonds mature in 2025 (10 years). For bonds of similar risk and maturity the market yield is 12%. Interest is paid semiannually on June 30 and December 31.

1. Determine the price of the bonds at January 1st 2016.

2. Prepare the journal entry to record their issuance by Ticket on January 1, 2016.

3. Prepare the journal entry to record interest on June 30, 2016 (at the effective rate).

4. Prepare the journal entry to record interest on December 31, 2016 (at the effective rate).

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  1. 28 July, 13:08
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    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.
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