Question

On January 1,2016, McKeown, Inc., issued $250,000 of 8%, 9year bonds for $220,776, yielding a market (yield) rate of 10%. Semiannual interest is payable on June 30 and December 31 of each year.

a) Show computations to confirm the bond issue price

b) Prepare journal entries to record the bond issuance, semiannual interest payment and discount amortization on June 30, 2016, and semiannual interest payment and discount amortization on December 31, 2016. Use the effective interest rate.

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

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

Answer 1

There are two semiannual month in a year so semi annual interst=250000*.08*6/12 = 10000

semiannual month = 9 * 2 =18

Semiannual yeild = 10% * 6/12 = 5%

Present value of principle repayment	PVF5% , 18 * Facevalue	.41552 * 250000	103880
Present value of interest	PVA5% , 18 * Interest	11.68959 * 10000	116895.9
Bound issue price			220776

present value annuity factor can be find from annuity table and present value factor can be find from present value table. at 5% for 18 periods

b).

Date	Account	Debit	credit
1 jan 2016	Cash	220776
	Discount on bond payable	29224
	Bond payable		250000
30 june 2016	Interest expense [220776*.10*6/12]	11039
	Discounton bond payable		1039
	cash [250000*.08*6/12]		10000
	[first semiannual payment made]
31dec 2016	Interest expense [221815*.10*6/12]	11091
	Discount on bond payable		1091
	cash		10000

carrying value of bond after first semiannual payment : 220776+1039= 221815