Question

In: Accounting

Serotta Corporation is planning to issue bonds with a face value of $410,000 and a coupon...

Serotta Corporation is planning to issue bonds with a face value of $410,000 and a coupon rate of 12 percent. The bonds mature in two years and pay interest quarterly every March 31, June 30, September 30, and December 31. All of the bonds were sold on January 1 of this year. Serotta uses the effective-interest amortization method and also uses a premium account. Assume an annual market rate of interest of 8 percent.

1.) Provide the journal entry to record the interest payment on March 31, June 30, September 30, and December 31 of this year. Round to the nearest whole dollar amount.

2.) What bonds payable amount will Serotta report on this year's December 31 balance sheet? (Round your final answers to nearest whole dollar amount.)

Solutions

Expert Solution

Maturity amount $       410,000
Interest period 8
Market rate of interest 2%
Quaterly interest paid $         12,300
(410,000*12%*3/12)
Annuity factor for 8 periods 7.3254
PV factor for 8th period 0.8534
Present value of interest $   90,102.42
Present value of maturity $       349,894
Issue price $       439,996
Amortization table
Date Interset paid Interest
Expense
Premium
Amortized
Unamortized
premium
Carrying
1-Jan-01 $          29,996 $        439,996
31-Mar-01 $         12,300 $          8,800 $          3,500 $          26,496 $        436,496
30-Jun-01 $         12,300 $          8,730 $          3,570 $          22,926 $        432,926
30-Sep-01 $         12,300 $          8,659 $          3,641 $          19,285 $        429,285
31-Dec-01 $         12,300 $          8,586 $          3,714 $          15,570 $        425,570
Journal entry
1-Jan Cash account Dr            439,996
              Bond payable account            410,000
              Premium on bond payable              29,996
31-Mar Interst exp Dr                8,800
Premium on bond payable                3,500
                Cash account              12,300
30-Jun Interst exp Dr                8,730
Premium on bond payable                3,570
                Cash account              12,300
30-Sep Interst exp Dr                8,659
Premium on bond payable                3,641
                Cash account              12,300
31-Dec Interst exp Dr                8,586
Premium on bond payable                3,714
                Cash account              12,300
Payable as on 31 Dec $       425,570

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