Question

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Exercise 14-9 (Algo) Issuance of bonds; effective interest; amortization schedule; financial statement effects (LO14-2] When Patey Pontoons issued 6% bonds on January 1, 2021, with a face amount of $840,000, 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.) ook 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. -int rences Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 Reg 3 Reg 4 Reg 5 and 6 Reg 7 Determine the price of the bonds at January 1, 2021. (Round final answers to the nearest whole dollar.) Table values are based on: Amount Present Value Cash Flow Interest Principal Price of bonds < Req1 Req 2 >

Answer 1

Answer:

1. bond price:

	Particulars	Cash flow	Discount factor	Discounted cash flow
	Interest payments-Annuity (5.5%,8 periods)	25200	6.3346	159631.92
	Principle payments -Present value (5.5%,8 periods)	840,000	0.6516	547344
A	Bond price			706975.92
	Face value			840000
	Premium/(Discount)			-133024.08
	Interest amount:
	Face value	840000
	Coupon/stated Rate of interest	6.00%
	Frequency of payment(once in)	6 months
B	Interest amount	840000*0.06*6/12=		25200
	Present value calculation:
	yield to maturity/Effective rate	11.00%
	Effective interest per period(i)	0.11*6/12=		5.50%
	Number of periods:
Ref	Particulars	Amount
a	Number of interest payments in a year	2
b	Years to maturity	4
c=a*b	Number of periods	8

2. Journal

Account		Debit	Credit
Cash		706975.92
Discount on bonds payable		133024.08
Bonds payable			840000
[bonds issued at discount]

3. Amortization schedule:

Period		Opening balance-Liability	Opening balance-Discount	Interest expense	Cash payment	Change in balance	Carrying amount of Bond	Closing balance-Discount
		A	B	C= A* 5.50%	D	E=C-D	F=A+E	G=B-E
Jun.30	2018	706975.92	133024.08	38883.68	25200	13683.68	720659.6	119340.4
Dec.31	2018	720659.6	119340.4	39636.28	25200	14436.28	735095.88	104904.12
Jun.30	2019	735095.88	104904.12	40430.27	25200	15230.27	750326.15	89673.85
Dec.31	2019	750326.15	89673.85	41267.94	25200	16067.94	766394.99	73605.91
Jun.30	2020	766394.99	73605.91	42151.72	25200	16951.72	783346.71	56654.19
Dec.31	2020	783346.71	56654.19	43084.07	25200	17884.07	801230.78	38770.12
Jun.30	2021	801230.78	38770.12	44067.69	25200	18867.69	820098.47	19902.43
Dec.31	2021	820098.47	19902.43	45102.43	25200	19902.43	840000	-0.00

4. Interest on June 30.

Interest expense		38883.68
Discount on bonds payable			13683.68
Cash			25200
[Interest payment entry]

5.

Balance sheet amount= 735095.88

6. Income statement amount=

78519.96

7. maturity entry:

Interest expense		45102.43
Discount on bonds payable			19902.43
Cash			25200
[Interest payment entry]
Bonds payable		840000
Cash			840000
[Bonds paid on maturity]