Question

On January 1,2016, McKeown, Inc., issued $250,000 of 8%, 9year bonds for $220,776, yielding a market (yield) rate of 10%. Semiannual interest is payable on June 30 and December 31 of each year.

a) Show computations to confirm the bond issue price

b) Prepare journal entries to record the bond issuance, semiannual interest payment and discount amortization on June 30, 2016, and semiannual interest payment and discount amortization on December 31, 2016. Use the effective interest rate.

c) Post the journal entries from part b) to their respective T-accounts

d) Record each of the transactions from part b) in the financial statement effects templat

Answer 1

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	Part a:
		PVf/Pvaf	Amount	PV
	Present Value of 250000 (n 18, i 5%)	0.415520655	$       250,000	$                          103,880
	Present Value of Interest 250000*4%	11.6895869	$          10,000	$                          116,896
	Bond Issure Price			$                          220,776
	Part b:
Date	Account	Debit	Credit
Jan 1 2016	Cash	$       220,776
Jan 1 2016	Discount on Bond Payable	$         29,224
Jan 1 2016	Bonds Payable		$       250,000
	(to reocrd bond issuance)
Jun 30 2016	Interest Expense	$         10,000
Jun 30 2016	Discount on Bond Payable	$            1,039
Jun 30 2016	Cash		$          11,039
	(to record interest and amortiazation)
Dec 31 2016	Interest Expense	$         10,000
Dec 31 2016	Discount on Bond Payable	$            1,091
Dec 31 2016	Cash		$          11,091
	(to record interest and amortiazation)
	Part c:
Bond Payable
Debit		Credit
		Jan 1	$       250,000
Discount on Bond Payable
Debit		Credit
Jan 1	$                                                                  29,224	Jun 30	$            1,039
		Dec 30	$            1,091
Interest Expense
Debit		Credit
Jun 30	$                                                                  10,000
Dec 30	$                                                                  10,000
Cash
Debit		Credit
Jan 1	$                                                                220,776	Jun 30	$          11,039
		Dec 30	$          11,091
Working:
	E*5%	250000*4%	A-B	Prior Bal-C	E+D
Period	A	B	C	D	E
0				$                            29,224	$ 220,776
1	$                                                                  11,039	$         10,000	$            1,039	$                            28,185	$ 221,815
2	$                                                                  11,091	$         10,000	$            1,091	$                            27,094	$ 222,906
	Part d: Financial Statement Effect
Date	Account	Debit	Credit	FS Effect
Jan 1 2016	Cash	$       220,776		Current Assets
Jan 1 2016	Discount on Bond Payable	$         29,224		Long term Liabilities
Jan 1 2016	Bonds Payable		$       250,000	Long term Liabilities
	(to reocrd bond issuance)
Jun 30 2016	Interest Expense	$         10,000		Expenses
Jun 30 2016	Discount on Bond Payable	$            1,039		Long term Liabilities
Jun 30 2016	Cash		$          11,039	Current Assets
	(to record interest and amortiazation)
Dec 31 2016	Interest Expense	$         10,000		Expenses
Dec 31 2016	Discount on Bond Payable	$            1,091		Long term Liabilities
Dec 31 2016	Cash		$          11,091	Current Assets
	(to record interest and amortiazation)