Question

Novak Ltd. sold $6,430,000 of 10% bonds, which were dated March 1, 2020, on June 1, 2020. The bonds paid interest on September 1 and March 1 of each year. The bonds' maturity date was March 1, 2030, and the bonds were issued to yield 12%. Novak's fiscal year-end was February 28, and the company followed IFRS. On June 1, 2021, Novak bought back $2,430,000 worth of bonds for $2,330,000 plus accrued interest.

1)

Using 1. a financial calculator, or 2. Excel function PV, calculate the issue price of the bonds and prepare the entry for the issuance of the bonds. (Hint: Use the account Interest Payable in your entry). (Round answer to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

2)

Prepare the journal entry for the scheduled interest payment on September 1, 2020. (Round answer to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

3)

Prepare any year-end entry required at February 28, 2021. (Round answer to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

4)

Prepare the entry required for the redemption of face value $2,430,000 of the bonds on June 1, 2021. (Round answer to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Answer 1

Answer-1:

Bond Price = $21,500 * [1 - [1 / (1 + 0.06)^60]] / (0.06) + [$430,000 / ((1 + 0.06)^60) = $360,506

Date	Account Name	Debit	Credit
Jun.01, 2020	Cash	$ 360,506
	Discount on bond payable	69,494
	Bonds payable		$ 430,000

Answer-2:

Date	Account Name	Debit	Credit
Sep.01, 2020	Interest expense (360,506*6%)	21,630
	Discount on bond payable		130
	Cash ($430,000*5%)		21,500

Answer-3:

Date	Account Name	Debit	Credit
Feb.28, 2021	No Entry

Date	Interest payment	Interest expenses	Amortization of Bond discount	Debit balance in bond discount payable A/c	Credit balance in bond payable A/c	Carrying value of bonds
0				$                69,494	$              430,000	$        360,506
Sep.01, 2020	$   21,500	$        21,630	$                   130	69,364	430,000	360,636
Mar.01, 2021	21,500	21,638	138	69,226	430,000	360,774
Sep.01, 2021	21,500	21,646	146	69,079	430,000	360,921