When Patey Pontoons issued 4% bonds on January 1, 2018, with a face amount of $7

Question

When Patey Pontoons issued 4% bonds on January 1, 2018, with a face amount of $740,000, the market yield for bonds of similar risk and maturity was 5%. The bonds mature December 31, 2021 (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.) 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 Req 2 Req 3 Req 4 Req 5 and 6 Req 7 Prepare an amortization schedule that determines interest at the effective rate each period. (Round final answers to the nearest whole dollar.) Semiannual Interest Period-End Cash Interest Bond Interest Discount Amortization Carrying Value Expense 01/01/2018 06/30/2018 12/31/2018 06/30/2019 12/31/2019 06/30/2020 12/31/2020 06/30/2021 12131/2021 Total 713,473 14,800 14,800 29,600 Req 2 Req 4>

Explanation / Answer

Req 1. Par valueof Bonds 740000 Cash Interest paid semi annually (740000*4%*6/12) 14800 Annuity present value factor at 2.50% for 8 periods 7.17014 Present value factor for 8th period at 2.50% 0.82075 Present value of maturity value 607355 Present value of interest paid 106118.1 Issue price f bonds 713473.1 Req 2. Journal entry for issuance of bonds: Cash account Dr. 713473 Discount on Bonds payable Dr. 26527      Bonds payable Account 740000 Req 3. Amort Chart: Semi Annual Cash Interest Bond Int. Discount Carrying Interest period Expense Amortization Value 01.01.18 713473 30.06.18 14800 17837 3037 716510 31.12.18 14800 17913 3113 719623 30.06.2019 14800 17991 3191 722814 31.12.19 14800 18070 3270 726084 30.06.20 14800 18151 3351 729435 31.12.20 14800 18235 3435 732870 30.06.21 14800 18321 3521 736391 31.12.21 14800 18409 3609 740000 Req 4. Journal entry 30.06.18 Interest Expense Account Dr. 17837     Cash account 14800     Discount on Bonds payable Account 3037 Req 5. Balance Sheet: Bonds payable 740000 Less: Discount on Bonds payable 20377 Bonds payable (Net) 719623 Req 6. Income Statement: Interest expense 35750 (17837+17913) Req 7. Journal Entries at the time of maturity: Date Account title and explanations Debit $ Credit $ 31.12.21 Interest Expense Dr. 18409     Cash account 14800      Discount on bonds payable 3609 31.12.21 Bonds payable Dr. 740000     Cash account 740000

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