On 1/1/2017, GarFunkle Company issued a 5-year $1,000,000 bond with stated inter
ID: 2338855 • Letter: O
Question
On 1/1/2017, GarFunkle Company issued a 5-year $1,000,000 bond with stated interest rate of 10%. Interests were payable semiannually on 7/1 and 1/1. The bond was issued for $926,399 cash. GarFunkle amortizes any bond discount/premium using the effective interest method.
(1)What is the semiannual market interest rate for the bond?
(2)Prepare journal entries on 1/1/2017 and 12/31/2017 for GarFunkle.
(3)After paying interests due on 1/1/2019, GarFunkle recalled the entire bond at 101. Recall expenses totaled $1,500. Prepare journal entries for the interest payment and retirement of the bond for GarFunkle.
(4)Assume that everything else is the same except that GarFunkle amortizes any bond discount/premium using the straight-line method. Re-do Item (3) above
Explanation / Answer
use rate formaule to find the market interest rate
=rate(nper,pmt,pv,fv,type)
=rate(10,(1000000*10%/2,-926399,1000000,0,1)
=6%
for annual ytm =6%*2=12
1)semi annual market interest rate is 6%
Cash (db) 926399
discount on bonds payable (db) 73602
bonds payable (cr) 1000000
2)
12/31/2017
Interest expense (db) (6%)*book value of bond= 6%*(926399+5583.94)=55919
discount on bonds payable (cr) 5919
Cash (cr) =(5%)*1000000=50000
3)The book value after paying 1/1/12019 is 950827
recall bond at 1.01*1000000=1010000 the final value
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