Question

When Patey Pontoons issued 4% bonds on January 1, 2021, with a face amount of $580,000, the market yield for bonds of similar risk and maturity was 5%. The bonds mature December 31, 2024 (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, 2021.
2. Prepare the journal entry to record their issuance by Patey on January 1, 2021.
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, 2021.
5. What is the amount related to the bonds that Patey will report in its balance sheet at December 31, 2021?
6. What is the amount related to the bonds that Patey will report in its income statement for the year ended December 31, 2021? (Ignore income taxes.)
7. Prepare the appropriate journal entries at maturity on December 31, 2024.

Answer 1

Solution 1:

Chart Values are based on:
n= (4 Years*2)	8	Half years
i= (5%/2)	2.50%	Semi annual
Cash Flow	Table Value	*	Amount	=	Present Value
Principal	0.820747	*	$5,80,000	=	$4,76,033
Interest (Annuity) [$580,000*4%*6/12]	7.170137	*	$11,600	=	$83,174
Price of Bonds					$5,59,207

Solution 2:

Patey Pontoons
Journal Entries
Date	Particulars	Debit	Credit
01-Jan-21	Cash A/c Dr	$5,59,207
	Discount on Bond Payable	$20,793
	To bonds payable		$5,80,000
	(Being bond issued at Discount)

Solution 3:

Bond Amortization Schedule
Date	Cash interest	Interest Expense	Discount amortization	Unamortized discount	Carrying value
01-Jan-21				$20,793	$5,59,207
30-Jun-21	$11,600	$13,980	$2,380	$18,413	$5,61,587
31-Dec-21	$11,600	$14,040	$2,440	$15,974	$5,64,026
30-Jun-22	$11,600	$14,101	$2,501	$13,473	$5,66,527
31-Dec-22	$11,600	$14,163	$2,563	$10,910	$5,69,090
30-Jun-23	$11,600	$14,227	$2,627	$8,282	$5,71,718
31-Dec-23	$11,600	$14,293	$2,693	$5,590	$5,74,410
30-Jun-24	$11,600	$14,360	$2,760	$2,829	$5,77,171
31-Dec-24	$11,600	$14,429	$2,829	$0	$5,80,000

Solution 4:

Journal Entries
Date	Particulars	Debit	Credit
30-Jun-21	Interest Expense Dr	$13,980
	To Discount on bond payable		$2,380
	To Cash		$11,600
	(To record Interest on June 30, 2021)
Solution 5:
Bonds reported on December 31, 2021 =		564026
Solution 6:
Interest expense to be reported in Income statement =		28020
Solution 7:
Journal Entries
Date	Particulars	Debit	Credit
31-Dec-24	Interest Expense Dr	$14,429
	To Discount on bond payable		$2,829
	To Cash		$11,600
31-Dec-24	Bond Payable Dr	$5,80,000
	To Cash		$5,80,000