Reporting Bonds Issued At Par On January 1, 2014 652246

Reporting Bonds Issued At Par Lo 10 2on January 1 2014 No

On January 1, 2014, Nowell Company issued $500,000 in bonds that mature in five years. The bonds have a stated interest rate of 8 percent and pay interest on June 30 and December 31 each year. When the bonds were sold, the market rate of interest was 8 percent. (If necessary, use the appropriate factor(s) from the tables provided.)

Required: 1. What was the issue price on January 1, 2014? 2. What amount of interest expense should be recorded on (a) June 30, 2014? and (b) December 31, 2014? 3. What amount of cash interest should be paid on (a) June 30, 2014? and (b) December 31, 2014? 4. What is the book value of the bonds on (a) December 31, 2014? and (b) December 31, 2015?

Paper For Above instruction

This paper examines the accounting treatment for bonds issued at par value, specifically focusing on a hypothetical issuance by Nowell Company on January 1, 2014. The bond issuance details, interest calculations, and subsequent valuation adjustments highlight the application of accounting principles related to bond issuance, interest expense recognition, and book value measurement over time.

Introduction

Bonds are a common form of long-term debt used by companies to raise capital. When bonds are issued at par value, the issue price equals the face value, and interest payments are consistent with the stated coupon rate. The case study of Nowell Company provides a clear illustration of bond accounting, emphasizing the recognition of interest expense, interest payments, and changes in bond book value over time. Understanding these concepts is essential for accurate financial reporting and analysis.

Bond Issue Price Calculation

On January 1, 2014, Nowell Company issued bonds with a face value of $500,000, a stated interest rate of 8 percent, and a maturity of five years. Since the market rate was also 8 percent, the bonds were issued at their face value, or par. Using the present value of a lump sum and an annuity, and considering the market rate, the issue price can be calculated as follows:

The present value of the face amount (lump sum): PV = Face value × PV factor at 8% for 5 years = $500,000 × 0.6807 ≈ $340,350.

The present value of interest payments (annuity): PV = Interest payment × PVA factor at 8% for 5 years. Interest payment = $500,000 × 8% = $40,000 annually. PVA factor at 8% for 5 years = 3.993.

Thus, PV = $40,000 × 3.993 ≈ $159,720.

Adding these together, the issuance price approximately equals $340,350 + $159,720 = $500,070, which is effectively at par value considering rounding. Therefore, the bonds were issued at their face value of $500,000.

Interest Expense Recognition

Interest expense should be recorded using the effective interest method. Since the bonds were issued at par, the interest expense for the first coupon period is calculated as follows:

June 30, 2014: Interest expense = Book value × market rate = $500,000 × 8% × (182/360) ≈ $20,000. Since the bonds were issued at par, and the market rate equals the stated rate, the interest expense matches the cash interest paid.

Similarly, December 31, 2014, interest expense remains approximately $20,000, aligning with cash interest payments, assuming no premium or discount amortization is necessary.

Cash Interest Payments

Cash interest payment is based on the bond's stated rate and face value and is paid semiannually:

• June 30, 2014: $500,000 × 8% / 2 = $20,000
• December 31, 2014: $20,000

These payments do not fluctuate since the bonds are issued at par, and interest is paid semiannually.

Book Value of Bonds Over Time

At issuance, the book value equals the issuance price, or $500,000. Over time, with interest expense recognized and cash paid, the book value may slightly adjust if the bonds are issued at a discount or premium. Since these bonds are issued at par and market interest equals the coupon rate, the book value remains unchanged at $500,000 for December 31, 2014.

By December 31, 2015, the bond's book value still remains at $500,000, as there are no premiums or discounts to amortize.

In summary, in this scenario, the bonds are issued at par, and interest expenses align with cash interest payments, maintaining the bond's book value throughout the period.

Conclusion

This case highlights fundamental bond accounting principles, including issue price determination at market interest rate parity, regular recording of interest expenses using the effective interest method, and the presentation of bonds payable at amortized cost. For bonds issued at par, the accounting process simplifies as the issuance price equals the face value, and interest expenses align closely with cash interest payments, thereby streamlining financial reporting.

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