Question

When Patey Pontoons issued 10% bonds on January 1, 2018, with a face amount of $800,000, the market yield for bonds of similar risk and maturity was 11%. The bonds mature December 31, 2021 (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, 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 in its income statement for the year ended December 31, 2018? (Ignore income taxes.) 7. Prepare the appropriate journal entries at maturity on December 31, 2021.

Answer 1

1. Price of the bonds at January 1, 2018

Interest $40,000 x 6.33457 *   =   $ 253383

Principal $800,000 x 0.65160 **  = $ 521280

Present value (price) of the bonds $ 774663

¥ 5% * $ 800000

* Present value of an ordinary annuity of $1: n= 8, i= 5.5% (Table 4)

** Present value of $1: n= 8, i= 5.5% (Table 2)

2. January 1, 2018

Cash(price determined above)..........................774663

Discount on bonds (difference)......................25337

To Bonds payable (face amount)......................800,000

3. Amortization schedule

Cash payment 5%*Face value	effective interest 5.5%* Out.Bal	Increase in Bal Dis. Reduction	Outstanding balance
			774663
40000	.055(774663)=42606	2606	777269
40000	.055(777269)=42750	2750	780019
40000	.055(780019)=42901	2901	782920
40000	.055(782920)=43061	3061	785981
40000	.055(785981)=43229	3229	789210
40000	.055(789210)=43407	3407	792617
40000	.055(792617)=43594	3594	796211
40000	.055(796211)=43789*	3789	800000
320000	345337	25337

4. June 30, 2018

Interest expense(5.5% x $774663) ....................42606

Discount on bonds payable (difference).....2,606

Cash(3% x $600,000)..................................40000

December 31, 2018

Interest expense(5.5% x [$774663 + 2,606]) ....42750

Discount on bonds payable (difference).....2750

Cash(5% x $800,000)..................................40000

5. Liability at December 31, 2018

Bonds payable (face amount)......................................$800,000

Less: discount ........................................................... (25337)

Initial balance, January 1, 2018 ............................... $774663

June 30, 2018 discount amortization ....................2606

Dec. 31, 2018 discount amortization .................... 2750

December 31, 2018 net liability ..................................$780019