Question

In: Accounting

On July 1, 2020, Davis Corp. issued 10-year, 800 Bonds, Par Value $1,000 each, Bonds carry...

On July 1, 2020, Davis Corp. issued 10-year, 800 Bonds, Par Value $1,000 each, Bonds carry 10% coupon rate, with interest payable semi-annually on January 1 and July 1. The bonds were issued for $ 908,722. On January 2, 2022, Davis offered to buy back the bonds at 103. Forty percent (40%) of the bondholders accepted the offer. Davis uses the effective-interest method of amortizing premium or discount.

Instructions

a) Prepare the journal entry to record the bond issuance.

b) Prepare the adjusting entry at December 31, 2020, the end of the fiscal year and the payment on Jan 1, 2021

c) What is the interest amount Davis will report for the year ended Dec 31, 2021.

d) What is the total cost of borrowing over the life of the bond?

e) Show the proper presentation for the Bonds on the Statement of Financial Position (Balance sheet) for Davis co. as of Dec 31, 2021.

f) Prepare the entry to record the retirement of the bonds for the 40% who accept the offer on January 2, 2022.

Round all values to the nearest dollar. ( Hint: you need to calculate the EIR)

Solutions

Expert Solution

a) Prepare the journal entry to record the bond issuance.

b) Prepare the adjusting entry at December 31, 2020, the end of the fiscal year and the payment on Jan 1, 2021

c) What is the interest amount Davis will report for the year ended Dec 31, 2021.

Interest = $36,203 + $36,051 = $72,254

d) What is the total cost of borrowing over the life of the bond?

Total Borrowing Cost = $458,208 (taking buyback into account)

Total Borrowing Cost = $691,278 (without taking buyback into account)

e) Show the proper presentation for the Bonds on the Statement of Financial Position (Balance sheet) for Davis co. as of Dec 31, 2021.

f) Prepare the entry to record the retirement of the bonds for the 40% who accept the offer on January 2, 2022.

$358,930 = $897,325*40%

Working Note:

1. Effective Interest Rate = 4% compounded semi annually (using Excel)

2. Amortisation table before taking buyback of bond

3. Amortisation table after taking buyback of bond

ekkarill92 answered 5 months ago

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