Question

Instructions: Problem is to be worked independently. All parts, excluding part 4, should be neatly handwritten in pencil and all work shown. January 1, 2019: Excel Corporation issued 10 year, 7% bonds with a face value of $1,550,000. The bonds were sold to yield 8%. Interest is payable annually on January 1. 1. What is the issue price of the bonds? (Show calculation or financial calculator inputs.) 2. Record the bond issuance on 1/1/19. Accounts Debit Credit 3. Assume the company prepares financial statements annually on December 31. Prepare the appropriate adjusting entries for December 31, 2019 for interest and for amortization of the discount or premium if the company used straight-line amortization. 12/31/19 Accounts Debit Credit For the remainder of the problem, assume effective interest method of amortization is used. 4. Using EXCEL, prepare an amortization table for the entire bond term. Table should be properly labeled and neatly presented on one page. Amounts should have commas and be rounded to the nearest dollar. Print and attach the table to this paper. HINTS: For the Date Column, you can use the EDATE Function to easily add 12 months to your starting date and copy down to create labels for each row. To avoid rounding differences, use the PV function to calculate your initial present value (carrying value) on the issue date. Set up formulas for each cell and round all amounts to the nearest dollars (do not manually compute and key in amounts). 5. Repeat Question 3. using the effective interest method of amortization. 12/31/19 Accounts Debit Credit

Problems 1-5. Please show all work, thanks.

Answer 1

Solution $1,550,000 7% 8% Face Value of Bonds Stated rate of interest Bond yield Bond life Interest payment frequency Total no. of interest payment till maturity 10 Years Annually 10 Annual interest payment = $1,550,000 x 7% = $108,500 Required 1.: Computation of issue price of bonds Annual interest payment Present value of an ordinary annuity of $1 for 10 years at 8% Present value of Annual interest payments ($108,500 x 6.71008) $108,500 6.71008 $728,044 Face value of bonds to be repaid at the time of maturity Present value of $1 for 10 years at 8% Present value of payment made on maturity ($1,550,000 x 0.46319) $1,550,000 0.46319 $717,950 Issue price of Bonds $1,445,994 Present value of an ordinary annuity of $1 for 10 years at 8% can be calculated as under: Present value annuity factor (Excel formula) = PV(8%, 10,-1,0) = 6.71008 Present value of $1 for 10 years at 8% can be calculated as under: Present value factor (Excel formula) = 1/(1 + 8%) 10 = 0.46319 Note: Present value annuity factor and present value factor is not rounded off. Issue price of bonds $1,445,994 Required 2.: Journal entry to record the bond issuance on 1/1/19. Credit Date Jan. 1, 2019 Accounts Cash Discount on Bonds Payable (Bal. fig.) Bonds Payable (To record issuance of bonds on 1/1/19) Debit $1,445,994 $104,006 $1,550,000

Required 3.: Journal entry to record interest and amortization of bond discount on Dec. 31, 2019 Step-1: Calculation of Annual interest expense using straight-line method Total interest payment during the entire Bond life ($108,500 x 10 Years) Payment of face value on maturity of Bonds Less: Cash proceeds received on issue price of Bond Total Interest expense to be recognised during the entire Bond life $1,085,000 $1,550,000 ($1,445,994) $1,189,006 Annual Interest Expense to be recognised ($1,189,006 / 10 years) $118,901 Step-2: Calculation of Annual discount amortization using straight-line method Annual interest payment Annual interest expense Annual discount amortization ($118,901 - $108,500) $108,500 $118,901 $10,401 Step-3: Journal entry Credit Debit $118,901 Date Accounts Dec 31, 2019 Interest Expense Discount on Bonds Payable Interest Payable $10,401 $108,500 (To record interest expense and discount amortization) Required 4.: Amortization table for the entire bond life Date 01/01/19 01/01/20 01/01/21 01/01/22 01/01/23 01/01/24 01/01/25 01/01/26 01/01/27 01/01/28 01/01/29 Bond Amortization table Effective interest method of Amortization Bonds sold to market yield Changes During the Year Ending Bond Liability Balances Discount Interest Cash paid Discount on Carrying Amortized Expense Bonds Payable Value $104,006 $1,445,994 $108,500 $7,179 $115,679 $96,827 $1,453,173 $108,500 $7,754) $116,254 $89,073 $1,460,927 $108,500 $8,374 $116,874 $80,699) $1,469,301 $108,500 $9,044 $117,544 $71,655 $1,478,345 $ 108,500 $9,7681 $118.268 $61,887 $1,488,113 $108,500 $10,549 $119,049 $51,338 $1,498,662 $108,500 $11,393 $119,893 $39,945 $1,510,055 $108,500 $12,304 $120,804 $27,641 $1,522,359 $108,500 $13,289 $121,789 $14,352 $1,535,648 $108,500 $14,352 $122,852) $1,550,000 $o Required 5.: Journal entry to record interest and amortization of bond discount on Dec. 31, 2019 Credit Date Dec 31, 2019 Accounts Interest Expense Discount on Bonds Payable Interest Pavable Debit $115,679 $7,179 $108,500 (To record interest expense and discount amortization)