Question

Danny Ferry Co. sells $250,000 of 10% bonds on March 1, 2007. The bonds pay interest on September 1 and March 1. The due date of the bond is September 1, 2010. The bond yield is 12%. Give entries through December 31, 2008.

Round to the nearest dollar.

Instructions:

Prepare all of the relevant journal entries from the time of sale until the date indicated. Use the effective interest method for discount amortization. (Assume the no reversing entries are made.)

Answer 1

		Amount $
	Present Value of Principal	166,264	=PV(6%,7,0,-250000,0)
	Add: Present Value of Interest	69,780	=PV(6%,7,-250000*5%,0,0)
	Issue price of Bonds	236,044

Date	Account Titles	Debit $	Credit $
March 1,2007	Cash	236,044
	Discount on Bond	13,956
	Bond Payable		250,000
September 1,2007	Interest Expense ( 236,044 x 6% )	14,163
	Discount on Bond		1,663
	Cash ( 250,000 x 5% )		12,500
December 31,2007	Interest Expense ( 236,044 + 1,663 ) x 6% x 4/6	9,508
	Discount on Bond		1,175
	Interest Payable ( 250,000 x 5% x 4/6 )		8,333
March 1,2008	Interest Expense ( 236,044 + 1,663 ) x 6% x 2/6	4,754
	Interest Payable	8,333
	Discount on Bond		587
	Cash ( 250,000 x 5% )		12,500
September 31,2008	Interest Expense ( 236,044 + 1,663 + 1,175 + 587 ) x 6%	14,368
	Discount on Bond		1,868
	Cash ( 250,000 x 5% )		12,500
December 31,2008	Interest Expense (236,044 + 1,663 + 1,175 + 587 + 1,868 ) x 6% x 4/6	9,653
	Discount on Bond		1,320
	Interest Payable ( 250,000 x 5% x 4/6 )		8,333