Question

Patrick Corporation issued 5% bonds on January 1, 2018, with a face amount of $1,000,000, the market rate for bonds of similar risk and maturity was 4%. The bonds mature in 20 years and pay interest semi­ annually on June 30 and December 31.

Create an Excel spreadsheet to answer the following requirements and submit a printout of your Excel formulas as well as a handwritten copy of your solutions to the requirements listed below.

Required:

1. Determine the price of the bonds at January 1, 2018.
2. Prepare the journal entry to record the issuance of the bonds on January 1, 2018.
3. Prepare a complete amortization schedule that determines interest at the effective rate each period using the format listed below:

Amortization Schedule

Date      Cash Interest    Effective Interest    Decrease in Balance   Outstanding Balance

4. Prepare the journal entry to record interest on June 30, 2018.
5. Prepare the appropriate journal entry when the bonds mature in 20 years.

Answer 1

Solution 1:

Computation of bond price
Table values are based on:
n=	40
i=	2%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.452890	$1,000,000.00	$452,890
Interest (Annuity)	27.355480	$25,000.00	$683,887
Price of bonds			$1,136,777

Solution 2:

Journal Entries
Date	Particulars	Debit	Credit
1-Jan-18	Cash Dr	$1,136,777.00
	To Bond Payable		$1,000,000.00
	To Premium on Bond Payable		$136,777.00
	(To record issue of bond at premium)

solution 3:

Bond Amortization Schedule
Date	Cash Interest	Effective Interest	Decrease in Balance	Outstanding Balance
1-Jan-18				$1,136,777
30-Jun-18	$25,000	$22,736	$2,264	$1,134,513
31-Dec-18	$25,000	$22,690	$2,310	$1,132,203
30-Jun-19	$25,000	$22,644	$2,356	$1,129,847
31-Dec-19	$25,000	$22,597	$2,403	$1,127,444
30-Jun-20	$25,000	$22,549	$2,451	$1,124,993
31-Dec-20	$25,000	$22,500	$2,500	$1,122,493
30-Jun-21	$25,000	$22,450	$2,550	$1,119,942
31-Dec-21	$25,000	$22,399	$2,601	$1,117,341
30-Jun-22	$25,000	$22,347	$2,653	$1,114,688
31-Dec-22	$25,000	$22,294	$2,706	$1,111,982
30-Jun-23	$25,000	$22,240	$2,760	$1,109,221
31-Dec-23	$25,000	$22,184	$2,816	$1,106,406
30-Jun-24	$25,000	$22,128	$2,872	$1,103,534
31-Dec-24	$25,000	$22,071	$2,929	$1,100,605
30-Jun-25	$25,000	$22,012	$2,988	$1,097,617
31-Dec-25	$25,000	$21,952	$3,048	$1,094,569
30-Jun-26	$25,000	$21,891	$3,109	$1,091,460
31-Dec-26	$25,000	$21,829	$3,171	$1,088,290
30-Jun-27	$25,000	$21,766	$3,234	$1,085,055
31-Dec-27	$25,000	$21,701	$3,299	$1,081,757
30-Jun-28	$25,000	$21,635	$3,365	$1,078,392
31-Dec-28	$25,000	$21,568	$3,432	$1,074,960
30-Jun-29	$25,000	$21,499	$3,501	$1,071,459
31-Dec-29	$25,000	$21,429	$3,571	$1,067,888
30-Jun-30	$25,000	$21,358	$3,642	$1,064,246
31-Dec-30	$25,000	$21,285	$3,715	$1,060,531
30-Jun-31	$25,000	$21,211	$3,789	$1,056,741
31-Dec-31	$25,000	$21,135	$3,865	$1,052,876
30-Jun-32	$25,000	$21,058	$3,942	$1,048,934
31-Dec-32	$25,000	$20,979	$4,021	$1,044,912
30-Jun-33	$25,000	$20,898	$4,102	$1,040,810
31-Dec-33	$25,000	$20,816	$4,184	$1,036,627
30-Jun-34	$25,000	$20,733	$4,267	$1,032,359
31-Dec-34	$25,000	$20,647	$4,353	$1,028,006
30-Jun-35	$25,000	$20,560	$4,440	$1,023,567
31-Dec-35	$25,000	$20,471	$4,529	$1,019,038
30-Jun-36	$25,000	$20,381	$4,619	$1,014,419
31-Dec-36	$25,000	$20,288	$4,712	$1,009,707
30-Jun-37	$25,000	$20,194	$4,806	$1,004,901
31-Dec-37	$25,000	$20,099	$4,901	$1,000,000

Solution 4:

Journal Entries
Date	Particulars	Debit	Credit
30-Jun-18	Interest expense Dr	$22,736.00
	Premium on bond payable Dr	$2,264.00
	To Cash		$25,000.00
	(To record interest payment and premium amortization)

Solution 5:

Journal Entries
Date	Particulars	Debit	Credit
1-Jan-28	Bond Payable Dr	$1,000,000.00
	To Cash		$1,000,000.00
	(To record payment at maturity)