When Patey Pontoons issued 10% bonds on January 1, 2021, with a face amount of $640,000, the market yield for bonds of similar r
isk and maturity was 11%. The bonds mature December 31, 2024 (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 $1) (Use appropriate factor(s) from the tables provided.) Required: 1. Determine the price of the bonds at January 1, 2021. 2. Prepare the journal entry to record their issuance by Patey on January 1, 2021. 3. Prepare an amortization schedule that determines interest at the effective rate each period. 4. Prepare the journal entry to record interest on June 30, 2021. 5. What is the amount related to the bonds that Patey will report in its balance sheet at December 31, 2021? 6. What is the amount related to the bonds that Patey will report in its income statement for the year ended December 31, 2021? (Ignore income taxes.) 7. Prepare the appropriate journal entries at maturity on December 31, 2024.
1 answer:
Answer and Explanation:
According to the scenario, computation of the given data are as follow:-
1) Semiannually Rate of interest = 11% ÷ 2 = 5.50% = 0.055
Number of years (half yearly) = 4 × 2 = 8 years
PVIF Value = 1 ÷ (1 + Interest Rate)^Number of years
=1 ÷ (1 + 0.055)^8
= 1 ÷ 1.5347
= 0.65160
PVIFA Value = [1 -1 ÷ (1 + Interest Rate)^Number of years ÷ Interest Rate
= [1 - 1 ÷ (1 + 0.055)^8] ÷ 0.055
= [1 - 0.65160] ÷ 0.055
= 6.33457
Particular PV table value Multiply Amount ($) PV value
Principle value 0.65160 × 640,000 $417,024
Annually interest Value 6.33 × 32,000 $202,706
($640,000 × 6 ÷ 12 × 10%)
Present Bond’s Price $619,730
2).
Journal Entry
On Jan.1,2021
Cash A/c Dr. $619,730
Discounts on bond payable A/c Dr. $20,270
To Bond payable A/c $640,000
(Being bond issued at discount is recorded)
3. The amortizable schedule is presented on the attachment below
4).
Journal Entry
June 30,2021
Interest expense A/c Dr. $34,085
To Cash A/c $32,000
To Discount on bond payable A/c $2,085
(Being interest expenses is recorded)
5) On December 31,2021 Amount of bonds reported = $624,015
6). Interest expenses reported in income statement
= $34,085 + $34,200
= $68,285
7).
Journal Entry
On Dec. 31,2024
Interest expense A/c Dr. $35,032
To Cash A/c $32,000
To Discount on bond payable A/c $3,032
(Being interest expense is recorded)
On Dec.31,2024
Bond payable A/c Dr. $640,000
To Cash A/c $640,000
(Being interest expense is recorded)
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