Question

Analyzing and Reporting Financial Statement Effects of Bond Transactions On January 1 of the current year, Trueman Corporation issued $600,000 of 20-year, 11% bonds for $554,861, yielding a market (yield) rate of 12%. Interest is payable semiannually on June 30 and December 31.
(a) Confirm the bond issue price. Round answers to the nearest whole number.
Present value of principal repayment Answer
Present value of interest payments Answer
Selling price of bonds $ 554,861
(b) Indicate the financial statement effects using the template for (1) bond issuance, (2) semiannual interest payment and discount amortization on June 30, and (3) semiannual interest payment and discount amortization on December 31 of the current year. Round answers to the nearest whole number. Use negative signs with answers, when appropriate.
Balance Sheet
Transaction Cash Asset + Noncash Assets = Liabilities + Contributed Capital + Earned Capital
(1) Answer Answer
1.00 points out of 1.00
Answer Answer Answer
(2) Answer Answer Answer Answer Answer
(3) Answer
0.00 points out of 1.00
Answer Answer Answer Answer
0.00 points out of 1.00
Income Statement
Revenue
-
Expenses
=
Net Income
Answer Answer Answer
Answer Answer Answer
0.00 points out of 1.00
Answer Answer Answer

Answer 1

Answer:

a) the issue price of the bonds was $554,861:

PV of face value = $600,000 / (1 + 6%)⁴⁰ = $58,333

PV of coupon payments = $33,000 x 15.046 (PV annuity factor, 6%, 40 periods) = $496,518

market price = $554,851 which is close enough to verify the issue price (the $10 difference is probably due to a rounding error).

b) the journal entries are:

January 1, year 1

Dr Cash 554,861

Dr Discount on bonds payable 45,139

    Cr Bonds payable 600,000

June 30, year 1

Dr Interest expense 33,292

    Cr Cash 33,000

    Cr Discount on bonds payable 292

amortization of discount of bonds payable = ($554,861 x 6%) - $33,000 = $291.66 ≈ $292

December 31, year 1

Dr Interest expense 33,309

    Cr Cash 33,000

    Cr Discount on bonds payable 309

amortization of discount of bonds payable = ($555,153 x 6%) - $33,000 = $309.18 ≈ $309

Assets                   =         Liabilities                                     +   Equity

Cash                         Bonds payable    Discount on BP

554,861                    600,000               (45,139)

(33,000)                                                 292                            (33,292)

(33,000)                                                 309                            (33,309)

Revenues      -          Expenses           =       Net income

0                                0                                  0

0                                33,292                         (33,292)

0                                33,309                         (33,309)