13 Example 14.7: On January 1,2016, the Ruffin Corporation issued $40,000 par value, 4%,four-year bonds that mature on December 31, 2019. Ruffin will pay interest 2 semiannually on June 30 and December 31. The company's fiscal year ends on December 31. What is the issue price of this bond assuming that the market rate of interest is 3 2%? What is the journal entry to record the issuance? Prepare an amortization table using the effective interest rate method. What journal entries are required to record 4 interest expense for the first year? Prepare the journal entry to record the maturity of the bonds. Prepare the t-accounts for the bond payable and bond premium 6 accounts for the life of the bond. 7 8 Since stated interest rate 4% > market interest rate 2%, we can predict and prove that these bonds will be issued at a premium (> Face Value) 9 10 When we issue the Bonds payable, we promise to pay 11 (1) Cash Interest every semiannual year = Face Value of the Bonds Payable x Semiannual stated rate 12 (2) Principal of $40,000 at the end of the 4th year 14 Every period we will pay cash interest 15 Annual Market Interest Rate Semiannual Market Interest Rate 16 2% 17 Annual Stated Interest Rate Semiannual Stated Interest Rate FV 18 44 19 Years Number of semiannual periods 20 4 21 Face Value of the Bonds Payable 22 The Bonds payable is issued at a premium 23 Present Value of the Bonds Payable = Present Value of the Bonds Payable - Face Value 24 25 26 27 Effective Rate Method 28 - Prior Carrying Value x Semiannual Market Interest Rate 29 Period Date Cash Interest Effective Interest Premium Amortized Carrying Value (Prior CV - Premium amortized) 30 0 1/1/2016 Initial CV = PV of the Bonds Payable 31 1 6/30/2016 32 2 12/28/2016 33 3 6/27/2017 Balance Sheet Presentation: 34 4 12/25/2017 Bonds Payable 35 s 6/24/2018 Add: Premium on B/P 36 6 12/22/2018 Carrying Value 37 7 6/21/2019 38 8 12/19/2019 -Face Value 39 40 41 42 43