Question

Buzzy Company sold $400,000 worth of 12%, ten year bonds on July1st, 2019, at a time when the market rate of interest on similar investments was 10%. The semiannual bonds pay interest on December 31st and June 30th . (a) Using the appropriate Present Value Table(s), determine the amount the bonds should sell for; their present value. (b) Journalize the necessary entry for the sale of the bonds. (c) Journalize the first interest payment on December 31, 2019 including the discount (or premium?) amortization assuming the company makes use of the straight-line method of bond interest amortization.

Answer 1

Solution a:

Chart Values are based on:
n= (10 Years*2)	20	Half years
i= (10%/2)	5%	Semi annual
Cash Flow	Table Value	*	Amount	=	Present Value
Par (Maturity) Value	0.376889	*	$4,00,000	=	$1,50,756
Interest (Annuity) [$400,000*12%*6/12]	12.462210	*	$24,000	=	$2,99,093
Price of Bonds					$4,49,849

Solution (b):

(b) Journal Entries - Buzzy Company
Date	Particulars	Debit	Credit
01-Jul-19	Cash A/c Dr	$4,49,849
	To bonds payable		$4,00,000
	To Premium on Bond Payable		$49,849
	(Being bond issued at Premium)

Solution (c):

(c ) Journal Entries - Buzzy Company
Date	Particulars	Debit	Credit
31-Dec-19	Interest Expense Dr	$21,508
	Premium on Bond Payable ($49849/20)	$2,492
	To Cash ($400,000*12%*6/12)		$24,000
	(To record first payment of Interest and Amortization of Premium on issue)