Question

When Patey Pontoons issued 4% bonds on January 1, 2018, with a face amount of $660,000, 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, FVD of $1 an 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

Answer 1

Bonds were issued at 636,338.5473

journal entries:

cash 636,339

discount on bonds 23,661

bonds payable 660,000

--to record issuance--

interest expense 15908

discount on bonds 2708

cash 13200

--to record first payment--

the attached image isthe amortization schedule

Step-by-step explanation:

we will first calculate the present value of the cuopon payment and maturity at the market rate:

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

C 13,200

time 8

rate 0.025

`13200 * (1-(1+0.025)^(-8) )/(0.025) = PV\\`

PV $94,645.8106

`(Maturity)/((1 + rate)^(time) ) = PV`

Maturity 660,000.00

time 8.00

rate 0.025

`(660000)/((1 + 0.025)^(8) ) = PV`

PV 541,692.74

PV c $94,645.8106

PV m $541,692.7367

Total $636,338.5473

method on effective rate:

carrying value x market rate = interest expense

bonds face value x bond rate = cash procceds

difference: amortization

the amortization as this is discount will increase the carrying value of the bond after each payment