Question

When Patey Pontoons issued 4% bonds on January 1, 2018, with a face amount of $500,000, the market yield for bonds of similar risk and maturity was 5%. 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

	principal				500,000
	interest paid on bonds 500,000*2%=				10000
	For Principal use PV of $1 table at 2.5% for 8 years
	for interest use PV of ordinary annuity table at 2.5% for 8 years
1)	Calculation of bonds issue price
	table values are based on
	n=	8
	i=	2.50%
	Cash flow		Amount	PV
	principal		500,000	410375		(500,000*.82075)
	interest expense		10000	71701		(20000*7.17014)
	price of bonds			482076
	(please use factor table as given in your question )
2)	Date	Accoounting titles & Explanations				Debit	Credit
	1/1/2018	Cash				482076
		Discount on bonds payable				17,924
		Bonds payable					500,000
3)	interest	cash	bond	discount	carring
	period	interest	interest	amortizatioon	value
	end		expense
			2.50%
	1/1/2018				482076
	06/30/18	10000	12052	2052	484128
	12/31/18	10000	12103	2103	486232
	06/30/19	10000	12156	2156	488387
	12/31/19	10000	12210	2210	490597
	06/30/20	10000	12265	2265	492862
	12/31/20	10000	12322	2322	495183
	06/30/21	10000	12380	2380	497563
	12/31/21	10000	12437	2437	500000
	total	80000	97924	17924
4)	Date	Accoounting titles & Explanations				Debit	Credit
	30/6/2018	interest expense				12052
		Discount on bonds					2052
		cash					10000
5)	December 31,2018 book value			486232
6)	interest expense for 2018			24155
7)
	Date	Accoounting titles & Explanations				Debit	Credit
	12/31/21	interest expense				12437
		Discount on bonds					2437
		cash					10000
		bonds payable				500,000
		cash					500,000