Question

4. The Reeves Company issued 10% bonds, dated January 1, 2017 with a face amount of $8 million. The bonds mature on December 31, 2026 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30th and December 31st. Required: 1. Determine the price of the bonds at January 1, 2017 2. Prepare the journal entry to record their issuance on January 1, 2017 3. Prepare the journal entry to record interest on June 30, 2017 (at the effective rate) 4. Prepare the journal entry to record interest on December 31, 2017 (at the effective rate)

Answer 1

Solution 1:

Chart Values are based on:
n= (10 Years*2)	20	Half years
i= (12%/2)	6%	Semi annual
Cash Flow	Table Value	*	Amount	=	Present Value
Par (Maturity) Value	0.311805	*	$80,00,000	=	$24,94,438
Interest (Annuity) [$8,000,000*10%*6/12]	11.469921	*	$4,00,000	=	$45,87,968
Price of Bonds					$70,82,406

Solution 2:

Reeves Company
Journal Entries
Date	Particulars	Debit	Credit
01-Jan	Cash A/c Dr	$70,82,406
	Discount on bond Payable Dr	$9,17,594
	To bonds payable		$80,00,000
	(Being bond issued at Discount)

Solution 3:

Date	Particulars	Debit	Credit
30-Jun	Interest Expense Dr ($7,082,406*12%*6/12)	$4,24,944
	To Discount on Bond payable		$24,944
	To Cash ($8,000,000*10%*6/12)		$4,00,000
	(To record first Interest Payment and Amortization of discount on issue)

Solution 4:

Date	Particulars	Debit	Credit
31-Dec	Interest Expense Dr [($7,082,406+$24944)*12%*6/12]	$4,26,441
	To Discount on Bond payable		$26,441
	To Cash ($8,000,000*10%*6/12)		$4,00,000
	(To record second Interest Payment and Amortization of Discount on issue)