Question

Please show the steps clearly

On January1, 2015, Hobart Company issued 2000000 face value of 11% for 20 years and the market rate at time of issuance was 10%.

They use the effective interest method to amortize their bond, interest paid semiannually on Julyt and January 1.

Instructions:

A) Compute the selling price of the bond.

(B) prepare all the necessary journal entries on the books of Hobart co. on July 1, 2015, and December 31, 2016

(C) Hobart Company issued the bond on May 1, 2015. The bond was dated January,1, 2015 and Interest is paid semiannually on Julyl and January. Compute the interest expense from January 1 to May 1, 2015 and prepare the journal entries on May 1, 2015 and July 1, 2015.

Answer 1

Part A
Table values are based on:
Face Amount	$                                            2,000,000
Interest Payment	$                                               110,000
Market Interest rate per period	5.00%
Cash Flow	Table Value(PV of 5% for 40 period)	Amount	Present Value
PV of Interest	17.15909	$                                       110,000	$1,887,500
PV of Principal	0.14205	$                                    2,000,000	$284,100
PV of Bonds Payable(Issue Price)			$2,171,600
Part B
	Col I	Col II	Col III	Col IV
Date	Interest Payment($2,000,000*5.5%)	Interest on carrying value(Bond carrying amount*5%)	Premium amortization	Bond carrying amount
Jan 1, 2015				2,171,600
Jul 1, 2015	110,000	108,580	1,420	2,170,180
Jan 1, 2016	110,000	108,509	1,491	2,168,689
Date	Accounts and explanation	Debit(in $)	Credit(in $)
Jul 1, 2015	Interest expenses	108,580
	Premium on Bond payable	1,420
	Cash		110,000
Jan 1, 2016	Interest expenses	108,509
	Premium on Bond payable	1,491
	Cash		110,000
Part C
Interest expense for 4 months(From Jan 1,2015 to May 1,2015) =$108,580*4/6 =$72,387
Interest payable for 4 months =$110,00*4/6 =$73,333
Premium amortization in 4 months =$73,333 - $72,387 =$946
Date	Accounts and explanation	Debit(in $)	Credit(in $)
May 1,2015	Interest expenses	72,387
	Premium on Bond payable	946
	Interest Payable		73,333
Jul 1, 2015	Interest expenses	36,193
	Interest Payable	73,333
	Premium on Bond payable	474
	Cash		110,000