Question

XYZ Co. issues $200,000 of 6%, 10-year bonds on January 2, 2012. The bonds pay interest annually on December 31. The market rate of interest on bonds of a similar default risk is 4% on the date the bonds are issued.

Requirements:

1.) Calculate the issuance (selling price) of the bonds:

     a.) Using ‘formulas’

     b.) Using “PV” function in Excel

  c.) Using financial calculator if you have one

2.) Prepare an amortization table for the 10 interest payments– using effective interest method of amortization. Using Excel

3. Prepare the required "journal entry" to record:

  a.) The issuance of the bonds payable on January 2, 2012

  b.) The first annual interest payment on Dec. 31, 2012 (USING THE

EFFECTIVE INTEREST METHOD—NOT STRAIGHT LINE--TO

AMORTIZE THE BOND PREMIUM)

  c.) The retirement of the bonds on the maturity date

Answer 1