Question

Using the effective method for recoding interest.... ABC Co. issued 11% bonds with a face amount of $8 million on Jan. 1, 2020, maturing Dec. 31, 2039. The market rate is 12%. Interest is paid twice a year on 6/30 and 12/31.

1. Prepare journal entries for:

1. issuance on 1/1/2020
2. recording interest on 6/30/2020
3. recording interest on 12/31/2020
4. recording interest on 6/30/2039
5. payment of interest and principle on 12/31/2039.

2. What is the selling price using Excel’s PV function?

Answer 1

Excel based PV function is also given below

Working notes: Based on PV table Amount PV factor at 6% 0.09722 15.04630 Face value $8,000,000 Cash interest $440,000 Issue price of Bond Face value of Bond Discount on issue of bond PV of Cash flows $777,778 $6,620,371 $7,398,148 $8,000,000 $601,852 Cash interest at 11% on $8,000,000 for 6 months 1 Credit Date Jan 1, 2020 Account Titles and Explanation Cash Discount on bonds payable Bond payable (To record issue of bonds) Debit $7,398,148 $601,852 $8,000,000 Credit Debit $443,889 Date Account Titles and Explanation June 30 2020 Interest expense Discount on bonds payable Cash (To record interest paid) $3,889 $440,000 Credit Debit $444,122 Date Account Titles and Explanation Dec 31 2020 interest expense Discount on bonds payable Cash (To record interest paid) $4,122 $440,000 Credit Debit $475,600 Date Account Titles and Explanation June 30 2039 Interest expense Discount on bonds payable Cash (To record interest paid) $35,600 $440,000 Credit Debit $8,000,000 Date Account Titles and Explanation Dec 31, 2039 Bond payable Cash (To record bond repayment) $8,000,000 Credit Debit $477,736 Date Account Titles and Explanation Dec 31, 2039 Interest expense Discount on bonds payable Cash (To record interest paid) $37,736 $440,000 2 Excel function DATA Face value of Bonds Contract rate of interest Term of bonds Market rate of interest Interest payment $1,000,000 11% 20 12% Cell G69 G70 G71 G72 semi Amount $924,769 Formula |--PV((G72/2),(G71*2),(G69*(G70/2)), G69) Selling price of the bond Working notes: Amortization table Effective-Interest Method Date Cash Interest Paid Interest expense Discount Amortization Unamortized Carrying Discount value Jan 2020 June 30,2020 Dec 31, 2020 June 30,2021 Dec 31, 2021 June 30,2022 Dec 31, 2022 June 30,2023 Dec 31, 2023 June 30,2024 Dec 31, 2024 June 30, 2025 Dec 31, 2025 June 30,2026 Dec 31, 2026 June 30, 2027 Dec 31, 2027 June 30,2028 Dec 31, 2028 June 30, 2029 Dec 31, 2029 June 30,2030 Dec 31, 2030 June 30, 2031 Dec 31, 2031 June 30, 2032 Dec 31, 2032 June 30, 2033 Dec 31, 2033 June 30,2034 Dec 31, 2034 June 30, 2035 Dec 31, 2035 June 30, 2036 Dec 31, 2036 June 30,2037 Dec 31, 2037 June 30, 2038 Dec 31, 2038 June 30,2039 Dec 31, 2039 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $440,000 $443,889 $444,122 $444,370 $444,632 $444,910 $445,204 $445,516 $445,847 $446,198 $446,570 $446,964 $447,382 $447,825 $448,295 $448,792 $449,320 $449,879 $450,472 $451,100 $451,766 $452,472 $453,221 $454,014 $454,855 $455,746 $456,691 $457,692 $458,754 $459,879 $461,072 $462,336 $463,676 $465,096 $466,602 $468,198 $469,890 $471,684 $473,585 $475,600 $477,736 $3,889 $4,122 $4,370 $4,632 $4,910 $5,204 $5,516 $5,847 $6,198 $6,570 $6,964 $7,382 $7,825 $8,295 $8,792 $9,320 $9,879 $10,472 $11,100 $11,766 $12,472 $13,221 $14,014 $14,855 $15,746 $16,691 $17,692 $18,754 $19,879 $21,072 $22,336 $23,676 $25,096 $26,602 $28,198 $29,890 $31,684 $33,585 $35,600 $37,736 $601,852 $597,963 $593,841 $589,471 $584,839 $579,930 $574,726 $569,209 $563,362 $557,163 $550,593 $543,629 $536,247 $528,421 $520,127 $511,334 $502,014 $492,135 $481,663 $470,563 $458,797 $446,325 $433,104 $419,090 $404,236 $388,490 $371,799 $354,107 $335,354 $315,475 $294,403 $272,068 $248,392 $223,295 $196,693 $168,495 $138,604 $106,920 $73,336 $37,736 $0 $7,398,148 $7,402,037 $7,406,159 $7,410,529 $7,415,161 $7,420,070 $7,425,274 $7,430,791 $7,436,638 $7,442,837 $7,449,407 $7,456,371 $7,463,753 $7,471,579 $7,479,873 $7,488,666 $7,497,986 $7,507,865 $7,518,337 $7,529,437 $7,541,203 $7,553,675 $7,566,896 $7,580,910 $7,595,764 $7,611,510 $7,628,201 $7,645,893 $7,664,646 $7,684,525 $7,705,597 $7,727,932 $7,751,608 $7,776,705 $7,803,307 $7,831,505 $7,861,396 $7,893,080 $7,926,664 $7,962,264 $8,000,000