ERA ARS tion Sofia Corporation issued 5,000 ofits 10% $1,000 par value bonds whe

ID: 2339213 • Letter: E

Question

ERA ARS tion Sofia Corporation issued 5,000 ofits 10% $1,000 par value bonds when the market rate is 85%for similar bonds. The bonds are dated January 1, 20x0 and will mature in twelve years. Interest is payable semiannually on January 1 and July 1 of each year. The company uses the effective interest method to amortize any premium or discount on bonds. The company's fiscal year is the calendar year. REQUIRED: () Compute the price of the bonds on January 1, 20X0. Round all calculations to the nearest whole dollar. Using the attached forms, prepare an amortization schedule for these bonds through the January 1, 20X2 interest payment. Round all calculations to the nearest whole dollar (2) (3) Using the attached forms, prepare all general journal entries, in proper form, that should be made during calendar years 20xO and 20X1 for these bonds. Show supporting calculations and round all answers to the nearest whole dollar. Provide a brief explanation for each entry

Explanation / Answer

Answer

--Working

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at market rate of interest, and

Discounted Interest payments amount (during the lifetime) at market rate of interest.

Bond Face Value

Market Interest rate (applicable for period/term)

PV of

$ 5,000,000.00

4.3%

Interest rate for

term payments

PV of $1

0.368276895

PV of

$ 5,000,000.00

0.368276895

$ 1,841,384.47

Interest payable per term

5.0%

$ 5,000,000.00

Interest payable per term

$ 250,000.00

PVAF of 1$

for

4.3%

Interest rate for

term payments

PVAF of 1$

14.86407307

PV of Interest payments

$ 250,000.00

14.86407307

$ 3,716,018.27

Bond Value (A+B)

$ 5,557,402.74

Answer: Price of the Bond = $ 5,557,403

Date

Beginning Carrying Value

Interest Expense

Interest paid

Discount (Premium) Amortisation

Ending Carrying Value

[A = Last ‘E’]

[B = A x 8.5% x 6/12]

[C = 5000 x 1000 x 10% x 6/12]

[D = B – C]

[E = E + D]

1 Jan 20X0

$ 5,557,403

1 Jul 20X0

$ 5,557,403

$ 236,190

$ 250,000

$ (13,810)

$ 5,543,593

1 Jan 20X1

$ 5,543,593

$ 235,603

$ 250,000

$ (14,397)

$ 5,529,195

1 Jul 20X1

$ 5,529,195

$ 234,991

$ 250,000

$ (15,009)

$ 5,514,186

1 Jan 20X2

$ 5,514,186

$ 234,353

$ 250,000

$ (15,647)

$ 5,498,539

1 Jul 20X2

$ 5,498,539

$ 233,688

$ 250,000

$ (16,312)

$ 5,482,227

1 Jan 20X3

$ 5,482,227

$ 232,995

$ 250,000

$ (17,005)

$ 5,465,222

1 Jul 20X3

$ 5,465,222

$ 232,272

$ 250,000

$ (17,728)

$ 5,447,493

1 Jan 20X4

$ 5,447,493

$ 231,518

$ 250,000

$ (18,482)

$ 5,429,012

1 Jul 20X4

$ 5,429,012

$ 230,733

$ 250,000

$ (19,267)

$ 5,409,745

1 Jan 20X5

$ 5,409,745

$ 229,914

$ 250,000

$ (20,086)

$ 5,389,659

1 Jul 20X5

$ 5,389,659

$ 229,061

$ 250,000

$ (20,939)

$ 5,368,720

1 Jan 20X6

$ 5,368,720

$ 228,171

$ 250,000

$ (21,829)

$ 5,346,890

1 Jul 20X6

$ 5,346,890

$ 227,243

$ 250,000

$ (22,757)

$ 5,324,133

1 Jan 20X7

$ 5,324,133

$ 226,276

$ 250,000

$ (23,724)

$ 5,300,409

1 Jul 20X7

$ 5,300,409

$ 225,267

$ 250,000

$ (24,733)

$ 5,275,676

1 Jan 20X8

$ 5,275,676

$ 224,216

$ 250,000

$ (25,784)

$ 5,249,892

1 Jul 20X8

$ 5,249,892

$ 223,120

$ 250,000

$ (26,880)

$ 5,223,013

1 Jan 20X9

$ 5,223,013

$ 221,978

$ 250,000

$ (28,022)

$ 5,194,991

1 Jul 20X9

$ 5,194,991

$ 220,787

$ 250,000

$ (29,213)

$ 5,165,778

1 Jan 20X0

$ 5,165,778

$ 219,546

$ 250,000

$ (30,454)

$ 5,135,323

1 Jul 20X0

$ 5,135,323

$ 218,251

$ 250,000

$ (31,749)

$ 5,103,575

1 Jan 20X1

$ 5,103,575

$ 216,902

$ 250,000

$ (33,098)

$ 5,070,477

1 Jul 20X1

$ 5,070,477

$ 215,495

$ 250,000

$ (34,505)

$ 5,035,972

1 Jan 20X2

$ 5,035,972

$ 214,028

$ 250,000

$ (35,972)

$ 5,000,000

Journal Entries from Year 20x0 to 20x1. Amount are filled from above amortisation table

Date

Explanation

Debit

Credit

1 Jan 20X0

Cash

$ 5,557,403

Premium on Bonds Payable

$ 557,403

Bonds Payable

5000000

(Bonds issued at premium)

1 Jul 20X0

Interest Expense

$ 236,190

Premium on Bonds Payable

$ 13,810

Cash

$ 250,000

(1st Interest payment)

1 Jan 20X1

Interest Expense

$ 235,603

Premium on Bonds Payable

$ 14,397

Cash

$ 250,000

(2nd Interest payment)

1 Jul 20X1

Interest Expense

$ 234,991

Premium on Bonds Payable

$ 15,009

Cash

$ 250,000

(3rd Interest payment)

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at market rate of interest, and

Discounted Interest payments amount (during the lifetime) at market rate of interest.

Navigate

ERA ARS Sofia Corporation issued 5,000 ofits 10% $1,000 par value bonds when the

ERACCELLMITS.CHOICESANDALTERNATIVES Multiple Choice ldentify the choice that bes

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.

ERA ARS tion Sofia Corporation issued 5,000 ofits 10% $1,000 par value bonds whe

Question

Explanation / Answer

Related Questions

Navigate