Question

When Patey Pontoons issued 10% bonds on January 1, 2018, with a face amount of $560,000, 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

Semiannual coupon = $ 560,000 x 10 % x 1/2 = $ 28,000.

n = 4 years x 2 = 8

i = 11 % x 1/2 = 5.5 %

PVAD of $ 1 at 5.5 %, n=8 = 6.3346.

PVA of $ 1 at 5.5 % , n=8 = 0.6516

1. Price of the bonds as on January 1, 2018 = $ 28,000 x 6.3346 + $ 560,000 x 0.6516 = $ 177,368.80 + $ 364,896 = $ 542,264.80 or $ 542,265.

2.

Date	Account Titles	Debit	Credit
		$	$
Jan 1, 2018	Cash	542,265
	Discount on Bonds Payable	17,735
	Bonds Payable		560,000

3. Amortization Schedule:

Period	Amount Paid	Interest Expense	Amortization of Bond Discount	Bond Discount	Carrying Value of Bonds Payable
0				17,735	542,265
1	28,000	29,825	1,825	15,910	544,090
2	28,000	29,925	1,925	13,985	546,015
3	28,000	30,030	2,030	11,955	548,045
4	28,000	30,142	2,142	9,813	550,187
5	28,000	30,260	2,260	7,553	552,447
6	28,000	30,385	2,385	5,168	554,832
7	28,000	30,516	2,516	2,652	557,348
8	28,000	30,652	2,652	0	560,000

4.

Date	Account Titles	Debit	Credit
		$	$
June 30, 2018	Interest Expense	29,825
	Cash		1,825
	Discount on Bonds Payable		28,000

5. Bonds Payable: $ 546,015

Discount on Bonds Payable: $ 13,985

6. Interest expense of $ 59,750.

7.

Date	Account Titles	Debit	Credit
		$	$
Dec 31, 2021	Bonds Payable	560,000
	Interest Expense	30,652
	Discount on Bonds Payable		2,652
	Cash		588,000