On January 1, 2021, Vision Inc. issued bonds with a maturity value of $5 million when the

Question:

On January 1, 2021, Vision Inc. issued bonds with a maturity value of $5 million when the market rate of interest was 5%. The bonds have a coupon (contractual) interest rate of 4% and mature on January 1, 2026. Interest on the bonds is payable semi-annually on July 1 and January 1 of each year. The company’s year end is December 31.


Instructions

a. Calculate the bonds’ issue price.

b. Prepare a bond amortization schedule from the date of issue up to and including January 1, 2023.

c. Prepare all of the required journal entries related to the bonds that Vision Inc. will record during 2021, including any adjusting journal entries at December 31, 2021.

d. What amounts would be reported as current and non-current in the liabilities section of Vision’s December 31, 2021, balance sheet?

e. Record the payment of interest on January 1, 2022.

f. The bonds were redeemed on January 1, 2023 (after the interest had been paid and recorded) at 98. Prepare the journal entry for the redemption of the bonds.

g. Assume instead that the bonds were not redeemed on January 1, 2023. Record the entry for the repayment of the bonds on January 1, 2026.

h. What will be the total interest payments over the fi ve-year life of the bonds? What will be the total interest expense over the five-year life of the bonds?


Taking It Further

Explain why the total interest payments over the fi ve-year life of the bonds is equal to or different than the total interest expense over the five-year life of the bonds.

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...
Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
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Related Book For  book-img-for-question

Accounting Principles Volume 2

ISBN: 978-1119502555

8th Canadian Edition

Authors: Jerry J. Weygandt, Donald E. Kieso, Paul D. Kimmel, Barbara Trenholm, Valerie Warren, Lori Novak

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