Chapter 1 Problem 12-19
Semiannual nominal interest (8,000,000 x 5%) 400,000
Semiannual effective interest (8,000,000 x 4%) 320,000
Difference 80,000
Multiply by PV of annuity of 1 for 10 periods at 4% 8.11
Premium 648,800
Face value 8,000,000
Purchase price 8,648,800
The amount of P648,800 is a premium because the effective rate is lower than
nominal rate.
Another approach
PV of principal (8,000,000 x .6756) 5,404,800
PV of semiannual interest payments (400,000 x 8.11) 3,244,000
Purchase price or present value of bonds 8,648,800
Journal entries
2008
Jan. 1 Held to maturity securities 8,648,800
Cash 8,648,800
July 1 Cash 400,000
Interest income 400,000
1 Interest income 54,048
Held to maturity securities 54,048
Interest received 400,000
Interest income (8,648,800 x 8% x 6/12) 345,952
Premium amortization 54,048
Dec. 31 Accrued interest receivable 400,000
Interest income 400,000
31 Interest income 56,210
Held to maturity securities 56,210
Interest accrued 400,000
Interest income (8,594,752 x 8% x 6/12) 343,790
Premium amortization 56,210
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