Question

When Patey Pontoons issued 6% bonds on January 1, 2018, with a face amount of $680,000, 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

Solution 1:

Face value of bond = $680,000

Coupon rate = 6%

Market yield on bond = 11%, 5.50% semi annual

Maturity period = 4 years

Issue price of bond will be equal to present value of future interest and principal discounted at YTM rate

Issue price = ($680,000*3%)* cumulative pv factor at 5.50% for 8 periods + $680,000 * pv factor at 5.50% for 8th period

= ($20,400 * 6.334566) + ($680,000*0.651599) = $572,312

Solution 2:

Journal Entries - Patey Pontoons
Date	Particulars	Debit	Credit
1-Jan-18	Cash A/c Dr	$572,312.00
	Discount on bonds A/c Dr (680000-572312)	$107,688.00
	To Bonds Payable		$680,000.00
	(Being bond issued at discount)

Solution 3:

Schedule of Interest Expense & Discount Amortization
Date	Cash Paid (680000*3%)	Interest Expense (Carrying amount *5.50%)	Discount Amortized (Interest Expense - Cash Paid)	Carrying amount of bond
1-Jan-18				$572,312
30-Jun-18	$20,400	$31,477	$11,077	$583,389
31-Dec-18	$20,400	$32,086	$11,686	$595,076
30-Jun-19	$20,400	$32,729	$12,329	$607,405
31-Dec-19	$20,400	$33,407	$13,007	$620,412
30-Jun-20	$20,400	$34,123	$13,723	$634,135
31-Dec-20	$20,400	$34,877	$14,477	$648,612
30-Jun-21	$20,400	$35,674	$15,274	$663,886
31-Dec-21	$20,400	$36,514	$16,114	$680,000

Solution 4:

Journal Entries - Patey Pontoons
Date	Particulars	Debit	Credit
30-Jun-18	Interest Expense A/c Dr	$31,477.00
	To Cash		$20,400.00
	To Discount on bonds		$11,077.00
	(Being interest paid on bond and discount amortized)