Accounting for bond
Problem-1: (page-1031 Exercise-17-6)
Rowe Corporation authorized TK 600000, 8% (payable 4% semiannually),
10 year bonds payable. The bonds were dated January 1, 19A, interest dates
are June and December 31.
Assume four different cases with respect to the sale of the bonds:
Case-A: Sold on January 1, 19A, at par.
Case-B: Sold on January 1, 19A, at 102.
Case-C: Sold on January 1, 19A, at 98.
Case-D: Sold on March 1, 19A, at par.
Required:
1. For each case, what amount of cash interest will be paid on the first
interest dated on June 30, 19A?
2. In what Cases will the yield rate of interest be (a) the same, (b) higher,
or (c) lower than the stated rate?
3. After the sale of the bonds and prior to maturity date , in what cases
will carrying or book value of the bonds (as reported on the balance
sheet) be (a) the same, (b) higher, or (c) lower than maturity or face
amount?
4. After the sale of the bonds in cases A, B and C, which case will report
interest expense (on the income statement) (a) the same , (b) higher, or
(c) lower than maturity or face amount?
Problem -2: (page-1031 Exercise 17-7)
Compute the bond price for each of the following situations (show
computations and round to nearest dollar):
a. A 10-year, TK1000 bond; annual interest at 7% (payable 3.5%
semiannually) purchased to yield 6% interest.
b. An 8-year TK 1000 bond; annual interest at 6% (payable annually)
Purchased to yield 7% interest.
c. A 10-year, TK 1000 bond, annual interest at 6% (payable
semiannually) purchased to yield 8% interest.
d. An 8-year TK1000; annual interest at 6% (payable annually)
purchased to yield 6% interest.
Problem-3: Y corporation issued to Z corporation a TK30000,8% ( payable
4% semiannually on June 30 and December 31), 10-year bond dated and
sold on January 1, 19A. Assumptions: Case –A-sold at par, Case-B-Sold at
103 and Case C-at 97.
Required: In parallel columns for the issuer and the investor (assume a long
–term investment), give the appropriate journal entries for each case on (1)
January 1, 19A, and (2) June 30, 19A. Assume the difference between the
interest method and the straight-line method of amortization is not material,
therefore, use straight-line amortization.
Problem-4: New Corporation sold and issued to Old Corporation a
TK10000, 9% (payable 4.5%, semiannually on June 30 and December 31),
10-year bond, dated and sold on January 1, 19A. The bond was sold at an
8% yield rate (4% semiannually)
Required :( round neared Taka)
Compute the price of the bond
In parallel columns for the issuer and the investor (assume a long-term
investment) give the appropriate journal entries on (a) January 1, 19Aand (b)
June 30, and 19A. Assume the difference between the interest method and
the straight-line method of amortization is not material, therefore, use
straight-line amortization.
Problem- 5: Red Corporation sold to White Corporation a TK10000 bond,
7% interest (payable annually on December 31). The bond was sold on
January 1, 19A, matures December 31, 19D, and the yield rate was 8%.
Required (round to nearest dollar):
1. Determine the selling price of the bond.
2. Prepare a bond amortization schedule using the interest method and
assuming the bonds are recorded at their gross amount.
3. In parallel column, give entries for the issuer and the investor (a long-
term investment) for the following dates, assuming the interest
method of amortization: (a) sale of the bond (b) first interest payment
and (c) all entries on the maturity date, December 31, 19D.
4. Show how the bond should be reported on the balance sheets of the
issuer and the investor at December 31, 19A.
Solution-1:
Here, Face value of bonds=TK6,oo,ooo.
Stated rate of interest 8% (semiannually)
So, Cash interest=(6,00,000x8%x1/2)=TK24,000
Req:-1: For each case, the amount at cash interest will be paid on the
first interest date, June 30, 19A is TK 24,000.
Req-2: (a) In case A and Case D, the yield rate and stated rate of
interest will be the same. [Case A & D, YR=SR]
(b) In case C, the yield rate is greater than the stated rate of
interest. [YR>SR]
(c) In case B, the yield rate is lower than the stated rate of
interest. [YR<SR]
Req-3: In case
