Saturn issues 6.5%, five-years bonds dated January 1, 2011, with a $500,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $510,666. The annual market rate is 6% on the issue date.
(Effective interest amortizatoin of bond premium computing bond price)
1. Compute the total bond interest expense over the bond's life.
2. Prepare an effective interest amortizatoin table
3. Prepare the journal entries to record the first two interest payments.
4. Use the market rate at issuance to compute the present value of the remaining cash flows for these bonds as of December 31, 2013. Compare your answer with the amount shown on the amortization table as the balance for that date and explain your findings.
AMORTIZATION OF A BOND THAT PAYS SEMI-ANNUAL COUPONS:
This solution analyzes a bond that pays semi-annual interest (or coupons) to bondholders. An Effective Interest Amortization Schedule is prepared and we determine the total bond interest expense for the bonds entire life span; and the Effective Interest on the bond.
The market rate of interest at the time the bond is issued is then used to help us determine the present value of the remaining cash flows on the bond.
In addition, the solution shows how the interest payments on the bond would be recorded in the company's general journal.