When Patey Pontoons issued 10% bonds on January 1, 2018, with a face amount of $

Question

When Patey Pontoons issued 10% bonds on January 1, 2018, with a face amount of $800,000, the market yield for bonds of similar risk and maturity was 11%. 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.

Explanation / Answer

1. Price of the bonds at January 1, 2018

Interest $40,000 x 6.33457 *   =   $ 253383

Principal $800,000 x 0.65160 **  = $ 521280

Present value (price) of the bonds $ 774663

¥ 5% * $ 800000

* Present value of an ordinary annuity of $1: n= 8, i= 5.5% (Table 4)

** Present value of $1: n= 8, i= 5.5% (Table 2)

2. January 1, 2018

Cash(price determined above)..........................774663

Discount on bonds (difference)......................25337

To Bonds payable (face amount)......................800,000

3. Amortization schedule

Cash payment

5%*Face value

effective interest

5.5%* Out.Bal

Increase in Bal

Dis. Reduction

Outstanding balance

4. June 30, 2018

Interest expense(5.5% x $774663) ....................42606

Discount on bonds payable (difference).....2,606

Cash(3% x $600,000)..................................40000

December 31, 2018

Interest expense(5.5% x [$774663 + 2,606]) ....42750

Discount on bonds payable (difference).....2750

Cash(5% x $800,000)..................................40000

5. Liability at December 31, 2018

Bonds payable (face amount)......................................$800,000

Less: discount ........................................................... (25337)

Initial balance, January 1, 2018 ............................... $774663

June 30, 2018 discount amortization ....................2606

Dec. 31, 2018 discount amortization .................... 2750

December 31, 2018 net liability ..................................$780019

Cash payment

5%*Face value

effective interest

5.5%* Out.Bal

Increase in Bal

Dis. Reduction

Outstanding balance

774663 40000 .055(774663)=42606 2606 777269 40000 .055(777269)=42750 2750 780019 40000 .055(780019)=42901 2901 782920 40000 .055(782920)=43061 3061 785981 40000 .055(785981)=43229 3229 789210 40000 .055(789210)=43407 3407 792617 40000 .055(792617)=43594 3594 796211 40000 .055(796211)=43789* 3789 800000 320000 345337 25337

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