Question

When Patey Pontoons issued 6% bonds on January 1, 2018, with a face amount of $760,000, the market yield for bonds of similar risk and maturity was 11%. The bonds mature December 31, 2021 (4 years). Interest is paid semiannually on June 30 and December 31. (EV of $1. PV of $1. FVA of $1. PVA of S1, 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. Complete this question by entering your answers in the tabs below. Req 1 Reg 2 Reg 3 Req 4 Reg 5 and 6 Req 7 Determine the price of the bonds at January 1, 2018. (Round final answers to the nearest whole dollar.) Table values are based on: Amount Present Value Cash Flow Interest Principal s Price of bonds 760,000

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	0.651599	*	$760,000	=	$495,215
Interest (Annuity) [$760,000*6%*6/12]	6.334566	*	$22,800	=	$144,428
Price of Bonds					$639,643

Solution 2:

Patey Pontoons
Journal Entries
Date	Particulars	Debit	Credit
01-Jan-18	Cash A/c Dr	$639,643
	Discount on Bond Payable	$120,357
	To bonds payable		$760,000
	(Being bond issued at Discount)

Solution 3:

Bond Amortization Schedule
Date	Cash interest	Interest Expense	Discount amortization	Unamortized discount	Carrying value
01-Jan-18				$120,357	$639,643
30-Jun-18	$22,800	$35,180	$12,380	$107,976	$652,024
31-Dec-18	$22,800	$35,861	$13,061	$94,915	$665,085
30-Jun-19	$22,800	$36,580	$13,780	$81,135	$678,865
31-Dec-19	$22,800	$37,338	$14,538	$66,598	$693,402
30-Jun-20	$22,800	$38,137	$15,337	$51,261	$708,739
31-Dec-20	$22,800	$38,981	$16,181	$35,080	$724,920
30-Jun-21	$22,800	$39,871	$17,071	$18,009	$741,991
31-Dec-21	$22,800	$40,809	$18,009	$0	$760,000

Solution 4:

Journal Entries
Date	Particulars	Debit	Credit
30-Jun-18	Interest Expense Dr	$35,180
	To Discount on bond payable		$12,380
	To Cash		$22,800
	(To record Interest on June 30, 2018)

Solution 5:

Bonds reported on December 31, 2018 =

665085

Solution 6:

Interest expense to be reported in Income statement =

71042

Solution 7:

Journal Entries
Date	Particulars	Debit	Credit
31-Dec-21	Interest Expense Dr	$40,809
	To Discount on bond payable		$18,009
	To Cash		$22,800
31-Dec-21	Bond Payable Dr	$760,000
	To Cash		$760,000