Question

In: Accounting

On june1, 2020 Jetcom inventors Inc. issued a $440,000 12%, three year bond. Interest is to...

On june1, 2020 Jetcom inventors Inc. issued a $440,000 12%, three year bond. Interest is to be paid semiannually beginning December 1, 2020.
Required:
a. Calculate the issue price of the bond assuming a market interest rate of 13%.
b. Using the effective interest method, Prepare an amortization schedule.

part 1
Prepare journal entries to the following
a. Issuance of the bonds on January 1, 2020
b. Payment of interest on December 1, 2020
c. Adjusting entry to accrue bond interest and discount amortization on January 31, 2020
Assume Jetcom Inventors Inc. has a January 31 year end

part 2
Show how the bonds will appear on the balance sheet under non- current liabilities at January 31, 2022

Solutions

Expert Solution

a)

Compute issue price of the bonds as follows:

Semiannual rate = 13.5%/2 = 6.5%

Time = 3 years   2 = 6

Interest payments = $440,000 12% 6/12 = $26,400

Present value of annuity [A] = $26,400 PVAF(6.5%, 6)

= $26,400 4.84101

= $127,803

_____________________________________________

Present value of maturity value [B] = $440,000 PVF(6.5%, 6)

= $440,000 0.68533

= $301,545

Issue price of the bond [A+B] = $127,803 + $301,545

= $429,348

______________________________________________________________________

b)

Prepare Amortization schedule as follows:

______________________________________________________________________

Prepare the journal entries as follows:

Trn. Genral Journal Debit Credit
a Cash $429,348
Discount on issue $10,652
Bond payable $440,000
b Interest expense $26,400
Cash $26,400

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