Question

When Patey Pontoons issued 6% bonds on January 1, 2021, with a face amount of $760,000, the market yield for bonds of similar risk and maturity was 11%. The bonds mature December 31, 2024 (4 years). Interest is paid semiannually on June 30 and December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
1. Determine the price of the bonds at January 1, 2021.
2. Prepare the journal entry to record their issuance by Patey on January 1, 2021.
3. Prepare an amortization schedule that determines interest at the effective rate each period.
4. Prepare the journal entry to record interest on June 30, 2021.
5. What is the amount related to the bonds that Patey will report in its balance sheet at December 31, 2021?
6. What is the amount related to the bonds that Patey will report in its income statement for the year ended December 31, 2021? (Ignore income taxes.)
7. Prepare the appropriate journal entries at maturity on December 31, 2024.

Answer 1

Requirement 1:

Cash interest = $760,000 x 3% = $22,800

Present value of interest payments	$144,428
[$22,800 x 6.33457 present value annuity factor (5.5%, 8 periods)]
Present value of face value	$495,216
[$760,000 x 0.65160 present value factor (5.5%, 8 periods)]
Price of the bonds at January 1,2021	$639,644

Requirement 2:

Date	Account title and Explanation	Debit	Credit
1/1/2021	Cash	$639,644
	Discount on bonds payable	$120,356
	Bonds payable		$760,000
	[To record issuance of bonds]

Requirement 3:

Amortization schedule (effective interest method)
Date	Cash interest	Interest expense	Discount amortized	Carrying amount
1/1/2021				$639,644
6/30/21	$22,800	$35,180	$12,380	$652,024
12/31/21	$22,800	$35,861	$13,061	$665,086
6/30/22	$22,800	$36,580	$13,780	$678,865
12/31/22	$22,800	$37,338	$14,538	$693,403
6/30/23	$22,800	$38,137	$15,337	$708,740
12/31/23	$22,800	$38,981	$16,181	$724,921
6/30/24	$22,800	$39,871	$17,071	$741,992
12/31/24	$22,800	$40,808*	$18,008	$760,000
Total	$182,400	$302,756	$120,356

*rounded to $2

Interest expense = Preceding carrying amount x 5.5%

Discount amortized = Interest expense - Cash interest

Carrying amount = Preceding carrying amount - Discount amortized

Requirement 4:

Date	Account title and Explanation	Debit	Credit
6/30/2021	Interest expense	$35,180
	Discount on bonds payable		$12,380
	Cash		$22,800
	[To record payment of interest]

Requirement 5:

Balance Sheet (partial)
At Dec 31,2021
Bonds payable	$760,000
Discount amortized	($94,914)
Carrying amount	$665,086

Requirement 6:

Income Statement (partial)
For the Year Ended Dec 31,2021
Expenses:
Interest expense [$35180+35861]	$71,041

Requirement 7:

Date	Account title and Explanation	Debit	Credit
12/31/2024	Interest expense	$40,808
	Bonds payable	$760,000
	Discount on bonds payable		$18,008
	Cash		$782,800
	[To record payment of interest and face value at maturity]