Chapter 14, Problem 9BPSB

To determine

Issue of bond at premium:

When the coupon rate or contract rate of a bond is higher than the market interest rate, the bond is being issued at premium. If the bond is issued at premium, the selling price of the bond will be higher than the face value of the bond.

Effective interest method:

Effective interest method aims at computing an accurate interest expense. In case of issue of bonds on premium, the carrying value of the bonds payable inclusive of premium amortized is used to determine the interest expense during a particular period. Hence the interest expense decreases as the carrying value of the bonds decrease.

To determine:

1. Computation of total bond interest expense over the bond’s life.

2. Prepare an amortization table for the bond’s life using effective interest method.

3. Prepare journal entries to record the first two interest payments.

4. Using market rate at issuance, compute the present value of the remaining cash flows for these bonds as of December 31, 2017. Compare your answer with the amount shown on the amortization table as the balance for that date and explain your findings.