Premium Bonds Simulation

ATTENTION!! :Don’t Forget, Before Doing this exercise, Read Proverbs 2:6 and Pray first.

On Jan 1, 2013, Galau co. Issued $ 500,000 of ten-year ( semi-annually on every June 30 and Dec 31 ), with 13% callable bonds at an effective rate 12%.
On June 30, 2013, Paid the first semi-annual interest on bonds.
On Dec 31, 2015, Galau co. has redemption the bonds at 98.

INSTRUCTIONS : 1. The bonds will sell at ? premium on bonds payable, because contract rate(callable bonds) is greater than market rate(effective rate)

2. Calculate the amount of :
(a).Interest( semiannually )
I= Fa x r x t = 500,000x13%x6/12= $32,500

(b).Selling Price( don’t forget use the Present Value method )
SPb = PVfa + PVi = Fa x (1+i)-n + I x {1-(1+i)-n/i} = $500,000 x (1+6%)-20 + $32,500 x {1-(1+6%)-20/6%} = $155,902.3634 + $372,772.4396 = $528,675

(c).Premium On Bonds Payable Amount ( Selling price – Face amount ) Premium on Bonds Payable= $528,675 - $500,000 = $28,675

(d). Amortized On Premium. Cash = $32,500 Premium on Bonds Payable= $28,675/20 = 1,433.75

3. Journalize the transactions.(don’t forget the date)

1) When issued the bonds.
2013
Jan. 1 Cash $528,675 Bonds Payable $500,000 Premium on Bonds Payable 28,675

2) When paid the first semi-annually interest.
Jun. 30 Interest Expense $32,500 Cash $32,500

3) When Amortizing. (and paid semiannually interest)
Jun. 30 Premium on Bonds Payable $1,434 Interest Expense $1,434
Jun. 30 Interest Expense $32,500 Cash $32,500

Or

Jun. 30 Interest Expense $31,066 Premium on Bonds Payable 1,434 Cash $32,500

4) When Redemption the bonds.( Calculate(c) and (d) before)
2015
Dec. 31 Bonds Payable $500,000 Premium on Bonds Payable 20,071 Cash $490,000 Gain on Redemption of Bonds 30,071