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 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.

Answer 1

Solution 1:
Chart Values are based on:
n= (4 Years*2)	8	Half years
i= (11%/2)	5.50%	Semi annual
Cash Flow	Table Value	*	Amount	=	Present Value
Principal	0.65160	*	$6,40,000	=	$4,17,024
Interest (Annuity) [$640,000*10%*6/12]	6.33457	*	$32,000	=	$2,02,706
Price of Bonds					$6,19,730

	Solution 2:
Patey Pontoons
Journal Entries
Date	Particulars	Debit	Credit
01-Jan-21	Cash A/c Dr	$6,19,730
	Discount on Bond Payable	$20,270
	To bonds payable		$6,40,000
	(Being bond issued at Discount)

Solution 3:
Bond Amortization Schedule
Date	Cash interest	Interest Expense	Discount amortization	Unamortized discount	Carrying value
01-Jan-21				$20,270	$6,19,730
30-Jun-21	$32,000	$34,085	$2,085	$18,185	$6,21,815
31-Dec-21	$32,000	$34,200	$2,200	$15,985	$6,24,015
30-Jun-22	$32,000	$34,321	$2,321	$13,664	$6,26,336
31-Dec-22	$32,000	$34,448	$2,448	$11,215	$6,28,785
30-Jun-23	$32,000	$34,583	$2,583	$8,632	$6,31,368
31-Dec-23	$32,000	$34,725	$2,725	$5,907	$6,34,093
30-Jun-24	$32,000	$34,875	$2,875	$3,032	$6,36,968
31-Dec-24	$32,000	$35,032	$3,032	$0	$6,40,000

Solution 4:
Journal Entries
Date	Particulars	Debit	Credit
30-Jun-21	Interest Expense Dr	$34,085
	To Discount on bond payable		$2,085
	To Cash		$32,000
	(To record Interest on June 30, 2021)
Solution 5:
Bonds reported on December 31, 2021 =		624015
Solution 6:
Interest expense to be reported in Income statement =		68285
Solution 7:
Journal Entries
Date	Particulars	Debit	Credit
31-Dec-24	Interest Expense Dr	$35,032
	To Discount on bond payable		$3,032
	To Cash		$32,000
31-Dec-24	Bond Payable Dr	$6,40,000
	To Cash		$6,40,000