Question

When Patey Pontoons issued a 6% bonds on January 1, 2018, with a face amount of 760,000, the market yield for bonds of similiar risk and maturity was 11%. The bonds mature December 31, 2021 (4 years). Interest is paid semiannually on June 30 and December 31.

1. Determine the price of the bonds at January 1, 2018

2. prepare the journal entry to record their issuance by Patey on January 1, 2018

3. Prepare an amortization schedule that determines interest at the effective rate each period

4. Prepare the journal entry to record interest on June 30, 2018

5. What is the amount related to the bonds that Patey will report in its balance sheet at December 31, 2018

6 What is the amount related to the bonds that Patey will report on its income statement for the year ended December 31, 2018

7 Prepare the appropriate journal entries at maturity on December 31, 2021

Answer 1

1. bond price:

	Particulars	Cash flow	Discount factor	Discounted cash flow
	Interest payments-Annuity (5.5%,8 periods)	22,800.0	6.3346	1,44,428.10
	Principle payments -Present value (5.5%,8 periods)	7,60,000	0.6516	4,95,215.14
A	Bond price			6,39,643.25
	Face value			7,60,000
	Premium/(Discount)			-1,20,356.75
	Interest amount:
	Face value	7,60,000
	Coupon/stated Rate of interest	6.00%
	Frequency of payment(once in)	6 months
B	Interest amount	760000*0.06*6/12=		22800
	Present value calculation:
	yield to maturity/Effective rate	11.00%
	Effective interest per period(i)	0.11*6/12=		5.50%
	Number of periods:
Ref	Particulars	Amount
a	Number of interest payments in a year	2
b	Years to maturiy	4
c=a*b	Number of periods	8

2. Journal

Account		Debit	Credit
Cash		6,39,643.25
Discount on bonds payable		1,20,356.75
Bonds payable			7,60,000.00
[bonds issued at discount]

3. Amortisation schedule:

Period		Opening balance-Liability	Opening balance-Discount	Interest expense	Cash payment	Change in balance	Carrying amount of Bond	Closing balance-Discount
		A	B	C= A* 5.50%	D	E=C-D	F=A+E	G=B-E
Jun.30	2018	6,39,643.25	1,20,356.75	35,180.38	22,800.00	12,380.38	6,52,023.62	1,07,976.38
Dec.31	2018	6,52,023.62	1,07,976.38	35,861.30	22,800.00	13,061.30	6,65,084.92	94,915.08
Jun.30	2019	6,65,084.92	94,915.08	36,579.67	22,800.00	13,779.67	6,78,864.59	81,135.41
Dec.31	2019	6,78,864.59	81,135.41	37,337.55	22,800.00	14,537.55	6,93,402.15	66,597.85
Jun.30	2020	6,93,402.15	66,597.85	38,137.12	22,800.00	15,337.12	7,08,739.27	51,260.73
Dec.31	2020	7,08,739.27	51,260.73	38,980.66	22,800.00	16,180.66	7,24,919.93	35,080.07
Jun.30	2021	7,24,919.93	35,080.07	39,870.60	22,800.00	17,070.60	7,41,990.52	18,009.48
Dec.31	2021	7,41,990.52	18,009.48	40,809.48	22,800.00	18,009.48	7,60,000.00	-0.00

4. Interest on June 30.

Interest expense		35,180.38
Discount on bonds payable			12,380.38
Cash			22,800.00
[Interet payment entry]

5.

Balancesheet amount= 6,65,084.92

6. Income statement amount=

35,861.30

7. maturity entry:

Interest expense		40,809.48
Discount on bonds payable			18,009.48
Cash			22,800.00
[Interet payment entry]
Bonds payable		7,60,000.00
Cash			7,60,000.00
[Bonds paid on maturity]