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Exercise 14-9 (Algo) Issuance of bonds; effective interest; amortization schedule; financial statement effects [LO14-2] When Patey...

Exercise 14-9 (Algo) Issuance of bonds; effective interest; amortization schedule; financial statement effects [LO14-2]

When Patey Pontoons issued 6% bonds on January 1, 2021, with a face amount of $600,000, the market yield for bonds of similar risk and maturity was 10%. The bonds mature December 31, 2024 (4 years). Interest is paid semiannually on June 30 and December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
1. Determine the price of the bonds at January 1, 2021.
2. Prepare the journal entry to record their issuance by Patey on January 1, 2021.
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, 2021.
5. What is the amount related to the bonds that Patey will report in its balance sheet at December 31, 2021?
6. What is the amount related to the bonds that Patey will report in its income statement for the year ended December 31, 2021? (Ignore income taxes.)
7. Prepare the appropriate journal entries at maturity on December 31, 2024.

Expert Solution

1. Determine the price of the bonds at January 1, 2021.

Working as follows:

n [4 years × 2]	8
i= 10%/2	5%

Interest Amount [$600,000 6% 6/12] = $18,000

Principal amount = $600,000

PVAD(5%,8 years) = 6.463212

PVA(5%, 8) = 0.67683

__________________________________________

Issue Price of the Bond = Interest amount PVAD(5%, 8) + Principal amount PVA(5%,8)

= [$18,000 6.4633] + [$600,000 0.67684

= $116,340 + $406102

= $522,442

__________________________________________________

Prepare Bond Amortization Schedule as follows:

Period	Cash Interest	Bond Interest Expense	Discount Amortization	Carrying Value
Jan. 01, 2021				$522,442
Jun. 30, 2021	$18,000	$26,122	$8,122	$530,564
Dec. 31, 2021	$18,000	$26,528	$8,528	$539,092
Jun. 30, 2022	$18,000	$26,955	$8,955	$548,047
Dec. 31, 2022	$18,000	$27,402	$9,402	$557,449
Jun. 30, 2023	$18,000	$27,872	$9,872	$567,322
Dec. 31, 2023	$18,000	$28,366	$10,366	$577,688
Jun. 30, 2024	$18,000	$28,884	$10,884	$588,572
Dec. 31, 2024	$18,000	$29,429	$11,429	$600,000

___________________________________________________________________

4. Prepare the journal entry to record interest on June 30, 2021.

Date	Account Titles	Debit	Credit
Jun. 30, 2021	Interest Expense	$26,122
	Discount on bond payable		$8,122
	Cash		$18,000
	(To record Interest Expense)

_______________________________________________________________________

5. Compute the amount related to the bonds that Patey will report in its balance sheet at December 31, 2021

Bonds reported on December 31, 2021 =

539092

_______________________________________________________________________

6.

Compute the amount related to the bonds that Patey will report in its income statement for the year ended December 31,2021

Amount = $26122 + $26528

= $52,650

______________________________________________________

7.

Prepare the appropriate journal entries at maturity on December 31, 2024:

Date	Account Titles	Debit	Credit
Dec. 31, 2024	Interest Expense	$29,429
	Discount on bond payable		$11,429
	Cash		$18,000
	(To record Interest Expense)

Dec. 31, 2024	Bond payable	$600,000
	Cash		$600,000

ekkarill92 answered 1 year ago

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