Question

When Patey Pontoons issued 6% bonds on January 1, 2018, with a face amount of $600,000, the market yield for bonds of similar risk and maturity was 7%. 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

Answer:

1.- issued at : $579,378

2.- the schedule is attached.

3 and 4.- journal entries

cash                                     579,378 debit

discount on bonds payable 20,622 debit

         bonds payabe                        600,000 credit

--to record issuance-------

interest expense 20278.23 debit

        discount on bonds payable     2278.23 credit

        cash                                  18000 credit

--to record June 30th payment---

5.-At December 31th 2018 will report as follow:

bonds payable        600,000

discount on bonds    (15,986)

                           net 584,014

6.- it will report interest expense for:

20,278.23 June

20,357.97 December

total: 40.636,2‬

7.- maturity:

interest expense 20,898.55

discount on bonds payable 2,898.55

cash 618,000

Explanation:

For the value of the bonds at issuance, we will calcualtethe present value of the coupon payment and the maturity at market rate.

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C 18,000 ( 600,000 x 0.06/2)

time 8 (4 years x 2 payment per year

rate 0.035(market rate / 2)

$18000 \times \frac{1-(1+0.035)^{-8} }{0.035} = PV$

PV $123,731.1997

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity   600,000.00

time   8.00

rate  0.035

$\frac{600000}{(1 + 0.035)^{8} } = PV$  

PV   455,646.93

PV c $123,731.1997

PV m  $455,646.9337

Total $579,378.1334

for the schedule we will multuply the carrying value by the market rate.

the ncompare with the proceed in cash to know the amortizaiton.

This amortization will increase the carrying value of the loan.