Bond Example - Review4. Prepare journal entries using the effective interest method:5. Prepare journal entries using the straight-line amortization method:Bond Example - ReviewQRS Inc. issues $5,000,000 in bonds on April 1, 2007. Interest payments are due semiannually on October 1 and April 1 of each year at a coupon rate of 10% per annum. The bonds were sold for $5,164,897. The bonds mature on April 1, 2011.1. Prepare an amortization table using the straight-line methodn Date Interest Paid Interest Expense Amortization Book Value0 4/1/07 5,164,8971 10/1/072 4/1/083 10/1/084 4/1/095 10/1/096 4/1/107 10/1/108 4/1/112. What was the effective interest rate?n=8pmt = 5,000,000 * 10%/2= _ _ _ _ _ _ _ -- put in as a positive numberFV = $5,000,000 -- put in as a positive numberPV = ($5,164,897) – put in as a negative numberSolve for “i” using financial calculator or Excel3. Prepare an amortization table using the effective interest method. n Date Interest Paid Interest Expense Amortization Book Value0 4/1/07 5,164,8971 10/1/072 4/1/083 10/1/084 4/1/095 10/1/096 4/1/107 10/1/108 4/1/114. What is the approximate fair value of the bonds on April 1, 2008, just after the interest is paid, if the yield rate on that date is 10.5% per annum?5. What is the approximate fair value of the bonds on December 31, 2008 when the yield rate is 9.5%?Period Interest Interest Amorti- Carrying BALANCE FACE Paid Expense zation Value PREMIUM VALUE0 04/01/07 0 0 0 5,164,897 164,897 5,000,000 1 10/01/07 250,000 232,420 17,580 5,147,318 147,318 5,000,000 2 04/01/08 250,000 231,629 18,371 5,128,947 128,947 5,000,000 4. Prepare journal entries using the effective interest method:4/1/05 – Bond Proceeds ReceivedCash _ _ _ _ _ _ _ _ _Notes Payable _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _10/1/07 Bond interest paidInterest expense (from table) _ _ _ _ _ _ _ _ Premium on bonds payable _ _ _ _ _ _ _ _Cash 250,00012/31/07 Accrual of interest at year endInterest expense (3/6 of line 2 in table) _ _ _ _ _ _ _ _Premium on bonds payable _ _ _ _ _ _ _ _Interest payable 125,0004/1/08 Bond interest paidInterest payable _ _ _ _ _ _ _ _Interest expense (rest of line 2 in table) _ _ _ _ _ _ _ _Premium on bonds payable _ _ _ _ _ _ _ _Cash 250,0005. Prepare journal entries using the straight-line amortization method:10/1/07 Bond interest paidInterest expense (from table) _ _ _ _ _ _ _ _Premium on bonds payable _ _ _ _ _ _ _ _Cash 250,00012/31/07 Accrual of interest at year endInterest expense _ _ _ _ _ _ _ _Premium on bonds payable _ _ _ _ _ _ _ _Interest payable _ _ _ _ _ _ _4/1/08 Bond interest paidInterest payable _ _ _ _ _ _ _ _Interest expense _ _ _ _ _ _ _ _Premium on bonds payable _ _ _ _ _ _ _ _Cash
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