On January 1, 2022, Balagtas Corp. issued 5-year bonds with face amount of P5,000,000 at 118. The entity paid issue cost of P100,000 onthe same date. The stated interest rate on the bonds is 12% payable annually every December 31 starting December 31, 2022. The bondsare issued to yield 8% per annum considering the bond issue cost.a. How much is the net cash proceeds from issuance of bonds on January 1, 2022?b. Prepare the amortization table of the bonds.c. Prepare the relevant journal entries for the year 2022 to 2026.
Question
On January 1, 2022, Balagtas Corp. issued 5-year bonds with face amount of P5,000,000 at 118. The entity paid issue cost of P100,000 onthe same date. The stated interest rate on the bonds is 12% payable annually every December 31 starting December 31, 2022. The bondsare issued to yield 8% per annum considering the bond issue cost.a. How much is the net cash proceeds from issuance of bonds on January 1, 2022?b. Prepare the amortization table of the bonds.c. Prepare the relevant journal entries for the year 2022 to 2026.
Solution
a. The net cash proceeds from the issuance of the bonds on January 1, 2022, can be calculated as follows:
First, calculate the gross proceeds from the bond issuance. The bonds were issued at 118, which means they were issued at 118% of their face value.
Gross proceeds = Face value of bonds x Issue price percentage Gross proceeds = P5,000,000 x 118% Gross proceeds = P5,900,000
Then, subtract the issue cost to get the net proceeds.
Net proceeds = Gross proceeds - Issue cost Net proceeds = P5,900,000 - P100,000 Net proceeds = P5,800,000
b. The amortization table of the bonds would be prepared using the effective interest method. This method involves calculating the interest expense for each period based on the carrying amount of the bond at the beginning of the period and the market interest rate. The difference between the interest expense and the cash interest payment is the amortization of the bond premium or discount for the period.
c. The relevant journal entries for the year 2022 to 2026 would include entries to record the issuance of the bonds, the payment of interest each year, and the amortization of the bond premium or discount. The exact entries would depend on the specifics of the bond agreement and the company's accounting policies.
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