Question

782 SECTION 3 Labtes and Shareholders' Equity bypassed for reasons of practical expediency in situations when doing so has no material effect on the results. Based on the frequency with which the straight-line method is used in practice, we can infer that managers very frequently conclude that its use has no material impact on investors' decisions. Concept Review Exercise ISSUING BONDS AND RECORDING INTEREST On January 1, 2018, the Meade Group issued $8,000,000 of 11% bonds, dated January 1. Interest is payable semiannually on June 30 and December 31. The bonds mature in four years. The market yield for bonds of similar risk and maturity is 10% Required: 1. Determine the price these bonds issued to yield the 10% market rate and record their issuance by the Meade Group 2. Prepare an amortization schedule that determines interest at the effective rate and record interest on the first interest date, June 30, 2018 Solution:

accounting

Answer 1

Solution 1:

Computation of bond price
Table values are based on:
n=	8
i=	5%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.6768	$8,000,000	$5,414,720
Interest (Annuity)	6.4632	$440,000	$2,843,812
Price of bonds			$8,258,532

Journal Entries - Meade Group
Event	Particulars	Debit	Credit
1	Cash A/c Dr	$8,258,532.00
	To Bonds payable		$8,000,000.00
	To Premium on Bonds payable		$258,532.00
	(To record issue of bond at Premium)

Solution 2:

Bond Amortization Table
Semiannual interest period end	Cash interest paid	Bond Interest Expense	Premium Amortization	Unamortized Premium	Carrying Value
1-Jan-18				$258,532	$8,258,532
30-Jun-18	$440,000	$412,927	$27,073	$231,459	$8,231,459
31-Dec-18	$440,000	$411,573	$28,427	$203,032	$8,203,032
30-Jun-19	$440,000	$410,152	$29,848	$173,183	$8,173,183
31-Dec-19	$440,000	$408,659	$31,341	$141,842	$8,141,842
30-Jun-20	$440,000	$407,092	$32,908	$108,934	$8,108,934
31-Dec-20	$440,000	$405,447	$34,553	$74,381	$8,074,381
30-Jun-21	$440,000	$403,719	$36,281	$38,100	$8,038,100
31-Dec-21	$440,000	$401,900	$38,100	$0	$8,000,000