Bonds Payable Issued at a

Premium
 

MAKE your dreams happen. 

 

Present Value of an Ordinary Annuity = (1-(1+i)^-1)

                                                                                                     i
 

Present Value of a SIngle Payment= (1+i)^-1)

                                             i
 
 

STATED RATE is greater than the MARKET RATE (Premium)

 

On January 1, 2021 Elize Corp. is authorized to issue P 2,000,000 of 5-year bonds dated Decem
14%. Interest on the bonds are payable semi-annually on June 30 and December 31 starting Dec
10%. What is the interest expense that shall be recognized for the year 2021?

STEPS Bonds Payable @ Face Value       P xx Bond

1.Get the PV of Cash Flows /CV, beg Unamortized Discount Unam
2.Prepare Amortization Table on Bonds Payable                                  (xx) on Bo
3.Prepare Journal Entries Carrying Value                                      P Carr
4.Get the CV, end to be presented in FS xx xx

Step 1: Present Value of Cash

Present Value of Principal

₱2,000,000 x (1+i)^-n

₱2,000,000 x 0.613913254

Present Value of Interest

₱140,000 x (1-(1+i)^-n)) 7.72173493

Total Present Value/ Carrying Value beginning

(see computation below)

Present Value Factor Present Value

Interest Payment (4%)
Formula Factor (5%)

₱140,000 x (1+i)^-1 0.95238095

₱140,000 x (1+i)^-2 0.90702948

₱140,000 x (1+i)^-3 0.8638376

₱140,000 x (1+i)^-4 0.82270247

₱140,000 x (1+i)^-5 0.78352617

₱140,000 x (1+i)^-6 0.7462154

 ₱140,000 x (1+i)^-7 0.71068133

₱140,000 x (1+i)^-8 0.67683936

₱140,000 x (1+i)^-9 0.64460892

₱140,000 x (1+i)^-10 0.61391325

Total

Or

(1-(1+i)^-n))
₱140,000 x 7.72173493 ₱1,081,042.89
i

Step 2: Amortization Table

Interest Expense (CVx Premium

Date Cash Payment Carrying Value
EIR)@ 5% Amortization

6/30/2021 ₱2,308,869.40

12/31/2021 ₱140,000 ₱115,443.47 ₱24,556.53 ₱2,284,312.87

6/30/2022 ₱140,000 ₱114,215.64 ₱25,784.36 ₱2,258,528.51

12/31/2022 ₱140,000 ₱112,926.43 ₱27,073.57 ₱2,231,454.94

6/30/2023 ₱140,000 ₱111,572.75 ₱28,427.25 ₱2,203,027.68

12/31/2023 ₱140,000 ₱110,151.38 ₱29,848.62 ₱2,173,179.07

6/30/2024 ₱140,000 ₱108,658.95 ₱31,341.05 ₱2,141,838.02

12/31/2024 ₱140,000 ₱107,091.90 ₱32,908.10 ₱2,108,929.92

6/30/2025 ₱140,000 ₱105,446.50 ₱34,553.50 ₱2,074,376.42

12/31/2025 ₱140,000 ₱103,718.82 ₱36,281.18 ₱2,038,095.24

6/30/2025 ₱140,000 ₱101,904.76 ₱38,095.24 ₱2,000,000.00

6/30/2025 ₱2,000,000 ₱0.00

  

Step 3: Journal Entries

6/30/2021 Cash ₱2,308,869.40

    
Premium
₱308,869.40
on Bonds
Payable
     Bonds
₱2,000,000.00
Payable

12/31/202 Interest
₱115,443.47
1 Expense
Premium
on Bonds ₱24,556.53
Payable
      Cash  ₱140,000

Interest
6/30/2022 ₱114,215.64
Expense
Premium
on Bonds ₱25,784.36
Payable

     Cash  ₱140,000

12/31/202 Interest
₱112,926.43
2 Expense
Premium
on Bonds ₱27,073.57
Payable

     Cash  ₱140,000

 
Step 4: Get the CV, end to
be presented in FS
Carrying Value December Carrying Value
OR
31, 2021 December 31, 2021
Bonds Payable @ Face ₱2,308,869.4
₱2,000,000.00 CV beginning 
Value 0
- Premium
- Unamortized Balance of Premium on ₱24,556.53
Amortization
Carrying Value ₱2,284,312.8
         Bonds Payable
December 31, 2021 7
(308,869.40-24,556.53) ₱284,312.87
Carrying Value
₱2,284,312.87
December 31, 2021
Carrying Value December Carrying Value
31, 2022 December 31, 2022
Bonds Payable @ Face CV beginning  (Dec ₱2,284,312.8
₱2,000,000.00
Value 31, 2021) 7
- Unamortized Balance + Discount
of Premium Amortization
( 25,784.36+27,073.
         Bonds Payable ₱52,857.93
57)
(284,312.87-25,784.36- Carrying Value ₱2,231,454.9
₱231,454.94
27,073.57) December 31, 2021 4
Carrying Value ₱2,231,454.9
December 31, 2021 4