Question

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West Gate Motor Homes Inc. Issued bonds with a par value of $680,000 and a five-year...

West Gate Motor Homes Inc. Issued bonds with a par value of $680,000 and a five-year life on January 1, 2019. The bonds pay interest on June 30 and December 31. The contract interest rate is 8%. The market interest rate was 9% on the original issue date.

Required
1. Calculate the issue price and the total bond interest expense over the life of the bonds.
2. Prepare an amortization table using the effective interest method similar to Exhibit 14.10

3. Show the journal entries that Westgate would make to record the first two interest payments. Assume a December 31 year end.
4. Use the original market interest rate to calculate the present value of the remaining cash flows for these bonds as of December 31, 2021. Compare your answer with the amount shown on the amortization table as the balance for that date and explain your findings

Solutions

Expert Solution

Answer 1

Coupon rate per Period (8%/2) 4.00%
Face value of bond $        680,000
Market rate per Period (9%/2) 4.50%
Interest paid (680000*4%) $          27,200
Interest paid on Semi annually
Number of period (5*2) 10
Market rate per Period used for PV factor.
Market rate per Period 4.50%
Period PV factor PVA factor
1            0.95694         0.95694
2            0.91573         1.87267
3            0.87630         2.74896
4            0.83856         3.58753
5            0.80245         4.38998
6            0.76790         5.15787
7            0.73483         5.89270
8            0.70319         6.59589
9            0.67290         7.26879
10            0.64393         7.91272
Amount Multiply: PV factor Present value
Face value $        680,000         0.64393 $        437,872
Interest paid $          27,200         7.91272 $        215,226
Issue price of bonds (Total of above) $        653,098
Less: face value of Bond $        680,000
Discount on Bond payable $          26,902
Add: Cash interest paid (27200*10) $        272,000
Total bond interest expense over the life of the bonds $        298,902

Answer 2

Interest payment (Credit Cash) = Face value of bond * Coupon rate
Interest Expense (Debit Interest Expense) = book value of Bond for previous period * Market or Discounting rate
Amortization of bond Discount (Credit Bond Discount) = Interest Expense - Interest payment
Debit Balance in Bond Discount = Debit Balance in Bond Discount for previous period - Amortization of bond Discount
Credit Balance in Bond Payable = Face value of bond
Book value of Bond = Credit Balance in Bond Payable - Debit Balance in Bond Discount
Bond Discount Amortization Table
Debit Balance in Bond Discount at end of retirement of bond payable must be Zero.
Period Date Interest payment Interest Expense Amortization of bond Discount Debit Balance in Bond Discount Credit Balance in Bond Payable Book value of Bond
0 Jan 1, 2019            26,902            680,000            653,098
1 June 30, 2019            27,200              29,389                 2,189            24,712            680,000            655,288
2 Dec 31, 2019            27,200              29,488                 2,288            22,424            680,000            657,576
3 June 30, 2020            27,200              29,591                 2,391            20,033            680,000            659,967
4 Dec 31, 2020            27,200              29,699                 2,499            17,535            680,000            662,465
5 June 30, 2021            27,200              29,811                 2,611            14,924            680,000            665,076
6 Dec 31, 2021            27,200              29,928                 2,728            12,195            680,000            667,805
7            27,200              30,051                 2,851              9,344            680,000            670,656
8            27,200              30,180                 2,980              6,365            680,000            673,635
9            27,200              30,314                 3,114              3,251            680,000            676,749
10            27,200              30,451                 3,251                       0            680,000            680,000

Answer 3

Journal entries
Date Account title Debit Credit
Jan 1, 2019 Cash $        653,098
Discount on Bond payable $          26,902
Bond payable $        680,000
(To record issued of bond payable at Discount.)
June 30, 2019 Interest expense $          29,389
Discount on Bond payable $            2,189
Cash $          27,200
(To record interest expense and amortization of bond Discount.)
Dec 31, 2019 Interest expense $          29,488
Discount on Bond payable $            2,288
Cash $          27,200
(To record interest expense and amortization of bond Discount.)

Answer 4

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