Question

When Patey Pontoons issued 10% bonds on January 1, 2021, with a face amount of $640,000, the market yield for bonds of similar risk and maturity was 11%. The bonds mature on 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 on 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.

Answer 1

	principal				640,000
	interest paid on bonds 640,000*5%=				25600
	For Principal use PV of $1 table at 5.5% for 8 years
	for interest use PV of ordinary annuity table at 5.5% for 8 years
1)	Calculation of bonds issue price
	table values are based on
	n=	8
	i=	5.50%
	Cash flow		Amount	PV
	principal		640,000	417024		(860,000*.65160)
	interest expense		25600	162165		(34400*6.33457)
	price of bonds			579189
	(please use factor table as given in your question )
2)	Date	Accoounting titles & Explanations				Debit	Credit
	1/1/2021	Cash				579189
		Discount on bonds payable				60,811
		Bonds payable					640,000
3)	interest	cash	bond	discount	carring
	period	interest	interest	amortizatioon	value
	end		expense
			5.50%
	1/1/2021				579189
	06/30/21	25600	31855	6255	585444
	12/31/21	25600	32199	6599	592044
	06/30/22	25600	32562	6962	599006
	12/31/22	25600	32945	7345	606352
	06/30/23	25600	33349	7749	614101
	12/31/23	25600	33776	8176	622276
	06/30/24	25600	34225	8625	630902
	12/31/24	25600	34700	9099	640000
	total	204800	265612	60811
4)	Date	Accoounting titles & Explanations				Debit	Credit
	30/6/2021	interest expense				31855
		Discount on bonds					6255
		cash					25600
5)	December 31,2021book value			592044
6)	interest expense for 2021			64055
7)
	Date	Accoounting titles & Explanations				Debit	Credit
	12/31/24	interest expense				34700
		Discount on bonds					9099
		cash					25600
		bonds payable				640,000
		cash					640,000