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Question 3 On 1 January 2018, Aro Limited issued bonds with a face value of $600,000...

Question 3

On 1 January 2018, Aro Limited issued bonds with a face value of $600,000 for cash.

The bond will mature after 5 years with a stated interest rate of 8% per year. Interest is paid annually on 31 December with the first payment on 31 December 2018.

Bond investors require an effective interest rate of 9% per year.

Aro Limited accounts for the bond using the effective-interest method.

Present value of 1 at 8% for 5 years = 0.68058

Present value of 1 at 9% for 5 years = 0.64993

Present value of an ordinary annuity of 1 at 8% for 5 years = 3.99271

Present value of an ordinary annuity of 1 at 9% for 5 years = 3.88965

Required:

Round to integers.

a. Determine the present value of the bonds on 1 January 2018.

b. Prepare the journal entry to record the issuance of bonds on 1 January 2018.

c. Prepare the bond amortisation table for Aro Limited, indicating the amount of interest payment, interest expense, amortisation, and carrying amount of the bonds at each 31 December for the first three years up to 31 December 2020.

d. Prepare the journal entry to record the first interest payment on 31 December 2018

Solutions

Expert Solution

Req a
Present value of the bonds
Present value of Interest                    186,703
Present value of Maturity                    389,958
Present value of the bonds                    576,661

ekkarill92 answered 1 year ago
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