Question

Analyzing and Reporting Financial Statement Effects of Bond Transactions

On January 1, 2016, Hutton Corp. issued $250,000 of 15-year, 20% bonds payable for $275,684, yielding an effective interest rate of 18%. Interest is payable semiannually on June 30 and December 31.

Required
a. Show computations to confirm the issue price of $275,684.
(Use a calculator or Excel for your calculations. Round your answers to the nearest dollar.)

Present value of principal repayment	$Answer
Present value of interest payments	$Answer
Selling price of bonds	$Answer

b. Prepare journal entries to record the bond issuance, semiannual interest payment and premium amortization on June 30, 2016, and semiannual interest payment and premium amortization on December 31, 2016. Use the effective interest rate method.
(Round your answers to the nearest dollar.)

General Journal
Date	Description	Debit	Credit
1/1/16	Answer

Answer	Answer
	Answer

Answer	Answer
	Bonds payable	Answer	Answer
6/30/16	Interest expense	Answer	Answer
	Answer

Answer	Answer
	Answer

Answer	Answer
12/31/16	Interest expense	Answer	Answer
	Answer

Answer	Answer
	Answer

Answer

Answer

c. Post the journal entries from part b to their respective T-accounts.

Cash (A)
01/01/16	Answer	Answer
06/30/16	Answer	Answer
12/31/16	Answer	Answer

Bonds Payable (L)
01/01/16	Answer	Answer
06/30/16	Answer	Answer
12/31/16	Answer	Answer

Interest Expense (E)
01/01/16	Answer	Answer
06/30/16	Answer	Answer
12/31/16	Answer	Answer

Bond Premium (L)
01/01/16	Answer	Answer
06/30/16	Answer	Answer
12/31/16	Answer	Answer

d. Record each of the transactions from part b in the financial statement effects template.

Balance Sheet Transaction Cash Asset + Noncash Assets = Liabilities + Contrib. Capital + Earned Capital 1/1/16 Issue bonds at a premium $Answer + $Answer = $250,000 + $Answer + $Answer Answer + Answer = Answer + Answer + Answer 6/30/16 Interest payment on bonds Answer + Answer = Answer + Answer + Answer 12/31/16 Interest payment on bonds Answer

Answer 1

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								Bond Premium
	Part a
	Face Amount		$                             250,000	C3
	Interest Payment	250000*10%*1/12	$                               25,000	C4
	Market Rate per period	18/2	9.0%	C5
	Period	15*2	30	C6
	Issue Price		$                             275,684
			=-PV(C5,C6,C4,C3)
	Present value of principal repayment	250000*0.075371	$                               18,843
	Present value of interest payments	25000*10.27365	$                             256,841
	Selling price of bonds		$                             275,684
	Part b
Date	Account	Debit	Credit
Jan 1 2016	Cash	$                275,684
Jan 1 2016	Premium on Bond Payable		$                               25,684
Jan 1 2016	Bonds Payable		$                             250,000
	(to reocrd bond issuance)
Jun 30 2016	Interest Expense	$                   24,812
Jun 30 2016	Premium on Bond Payable	$                        188
Jun 30 2016	Cash		$                               25,000
	(to record interest and amortiazation)
Dec 31 2016	Interest Expense	$                   24,795
Dec 31 2016	Premium on Bond Payable	$                        205
Dec 31 2016	Cash		$                               25,000
	(to record interest and amortiazation)
Date	Interest	Cash Paid	Decrease in Carrying Value	Carrying Value
	9.00%	10%
01-Jan-16			$                               25,684	$          275,684
30-Jun-16	$                                                 24,812	$                   25,000	$                                    188	$          275,496
31-Dec-16	$                                                 24,795	$                   25,000	$                                    205	$          275,290
	Part c
	Cash (A)
	1/1/16	$                275,684
	06/30/16		$                               25,000
	12/31/16		$                               25,000
	Bonds Payable (L)
	1/1/16		$                             250,000
	06/30/16
	12/31/16
	Interest Expense (E)
	1/1/16
	06/30/16	$                   24,812
	12/31/16	$                   24,795
	Bond Premium (L)
	1/1/16		$                               25,684
	06/30/16	$                        188
	12/31/16	$                        205
	Part-d
	Balance Sheet
	Transaction	Cash Asset	+	Noncash Assets	=	Liabilities	+	Contrib. Capital	+	Earned Capital
	1/1/16 Issue bonds at a premium	$                275,684	+		=	$250,000	+		+
			+		=	$ 25,684	+		+
	6/30/16 Interest payment on bonds	$                 -25,000	+		=	$      -188	+		+	$          -24,812
	12/31/16 Interest payment on bonds	$                 -25,000				$      -205				$          -24,795