University of Michigan

ACC FINANCIAL

Bonds Payable Case
This case illustrates most of the topics that we cover regarding bonds payable. It requires you to
make various calculations and journal entries for three businesses, each of which are issuing
identical bonds. However, one company’s bonds sell at par; one company’s bonds sell at a
premium; and one company’s bonds sell at a discount.
1. Groucho Co. sold $4 million of 10-year bonds on December 31, 2016, with interest
payable June 30 and December 31 at an annual rate of 9%. The bonds were priced to yield
an effective rate of 9%.
a. What were the proceeds received by Groucho upon the sale of the bonds?
The market rate and coupon rate are equal on the date of the sale so the bonds are issued at face:
$4,000,000.
b. Prepare the entry made by Groucho to record the sale of the bonds on December 31, 2016.
Dec 31, 2016 Cash 4,000,000
Bonds Payable 4,000,000
c. What is the total amount of interest payments to be made by Groucho over the life of the
bonds?
Payment per coupon: $4,000,000 x 9%/yr x 0.5 yrs = $180,000
$180,000/payment x 2 payments/yr x 10 yrs = $3,600,000
d. What is the total amount of interest expense that Groucho will record over the life of the
bonds?
Because the bonds were issued at par, total interest expense is equal to the total coupon payment:
$3,600,000.
e. What will be the net book value of the bonds at December 31, 2020, after the company makes
the eighth semiannual cash interest payment?
Because the bonds were issued at par, net book value is equal to the face amount at any point in
the 10 yrs: $4,000,000.
f. Prepare the entry to record the ninth semiannual payment on June 30, 2021.
Interest Expense 180,000
Cash 180,000
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2. Chico Co. sold $4 million of 10-year bonds on December 31, 2016, with interest payable
June 30 and December 31 at an annual rate of 9%. The bonds were priced to yield an
effective rate of 8%.
a. What were the proceeds received by Chico upon the sale of the bonds?
Semi-annual interest payable (double n) at 20 periods and 4%:
Ordinary PV = 1 / (1+r)n = 1 / (1+0.04)20 = 0.45639
Annuity PV = (1 – (1+r)–n) / r = (1 – (1+0.04)–20) / 0.04 = 13.59033
($4,000,000 x 0.45639) + ($180,000 x 13.59033) = $4,271,819.40
b. Prepare the entry made by Chico to record the sale of the bonds on December 31, 2016