Question

On January 2, Lincoln Motors, Inc. issued 1,000, $1,000 bonds to finance a new showroom. The bonds are 5-year, 6% bonds that pay interest on December 31 each year. When issued, investors required 7% interest and the bonds are due December 31, Year 5.

Required:

1.      Compute the selling price of the bonds.  3 PUNTOS

2.      Prepare the entry to record the sale of the bonds. 3 PUNTOS

3.      Prepare the amortization table for the bonds. 5 PUNTOS

4.      Prepare the journal entries for the first annual interest payment and the final repayment of the bonds. 5 PUNTOS

Answer 1

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		Computation of selling price of bond
	1	Year	Cash flow	Present value factor @ 7%	Present value
		A	B ($ 1000 per bond*1000 bonds=1,000,000*6%=60,000)	C=1/(1+7%)^A	D=B*C
		1	60,000	0.9346	56,075
		2	60,000	0.8734	52,406
		3	60,000	0.8163	48,978
		4	60,000	0.7629	45,774
		5	60,000	0.7130	42,779
		5	1,000,000	0.7130	712,986
		Present value of bond proceeds or selling price of all bonds	958,998
		No of Bonds	1,000
		Selling price of each bond	959
	2	Date	Account title and explanation	Debit $	Credit $
		January 2	Cash	958,998
			Discount on issue of bond	41,002
			6% Bond Payable		1,000,000
			(To record the issue of bond at discount)
	3	Amortization table of bond	Amortization table of bond
		Year	Interest Payment	Discount Amortization	Interest Expenses
		A	B=1,000,000*6%	C=41,002/5 years	D=B+C
		1	60,000	8,200.39	68,200.39
		2	60,000	8,200.39	68,200.39
		3	60,000	8,200.39	68,200.39
		4	60,000	8,200.39	68,200.39
		5	60,000	8,200.39	68,200.39
		Total	300,000	41,002	341,002
	4	Date	Account title and explanation	Debit $	Credit $
		December 31	Interest Expenses	68,200
			Cash		60,000
			Discount on issue of bond		8,200
			(To record the payment of interest and amortization of discount on issue of bond as interest expense)
		Date	Account title and explanation	Debit $	Credit $
		December 31	6% Bond Payable	1,000,000
			Cash		60,000
			(To record the final repayment of principle amount of 6% bond payable)		-