Dantonio Company issued five-year, 7% bonds with a total face value of $920,000
ID: 2468024 • Letter: D
Question
Dantonio Company issued five-year, 7% bonds with a total face value of $920,000 on January 1, 2015. Interest is paid semi-annuallyon June 30 and December 31. The market rate of interest on this date was 6%. Dantonio uses the effective interest rate method.
Required:
Determine the proceeds of the bond sale on 1/1/15. Explain your method of calculation.
Did this bond sell at a premium or discount? In 1-2 sentences explain why it sold at a premium or discount.
Using Excel, prepare a five-year bond amortization schedule for these bonds. There are examples in your notes and posted on D2L.Use formulas and reference cells in Excel to show how you calculate your numbers.
Prepare journal entries to record (1) the sale of the bonds on January 1, 2015, (2) the interest payment for the period ended June 30, 2015 and, (3) the final interest and face value payment at maturity on December 31, 2019.
Show how the balance sheet would report the bond liability and related premium/discount on December 31, 2016.
Explanation / Answer
Answer :
Assume bond face value is $ 1000
Interest will be 1000*7% = $ 70 paid annualy or $35 semi annually
Tenure of Bonds = 5 years = 10 semi annual
Required rate of return = 6%
Value of Bond will be =
$ 1042.55.
We use present value method. proceeds from bonds will be
920000/1000*1042.55
= $ 959146/-
This bond sale on premium becasue its interest rate is more than the market interest rate.
Balance sheet on 12/31/2016
35 (PVIFA 3% 10) +1000(PVIF 3%,10) 35*8.530+1000*.744$ 1042.55.
We use present value method. proceeds from bonds will be
920000/1000*1042.55
= $ 959146/-
This bond sale on premium becasue its interest rate is more than the market interest rate.
Amortozation Table Date Interest payment stated (7/2) = 3.5% Interest Expenses market (6/2) = 3% previous BV Amortization of Bond premium Credit Balance in Bond Premium account Credit Balance in Bond Payable account Book value of the bonds A B C D E F G C = G*3% D = C-B G =F+E 1/1/2015 39146.00 920000.00 959146.00 6/30/2015 32200.00 28774.38 (3,425.62) 35720.38 920000.00 955720.38 12/31/2015 32200.00 28671.61 (3,528.39) 32191.99 920000.00 952191.99 6/30/2016 32200.00 28565.76 (3,634.24) 28557.75 920000.00 948557.75 12/31/2016 32200.00 28456.73 (3,743.27) 24814.48 920000.00 944814.48 6/30/2017 32200.00 28344.43 (3,855.57) 20958.92 920000.00 940958.92 12/31/2017 32200.00 28228.77 (3,971.23) 16987.69 920000.00 936987.69 6/30/2018 32200.00 28109.63 (4,090.37) 12897.32 920000.00 932897.32 12/31/2018 32200.00 27986.92 (4,213.08) 8684.24 920000.00 928684.24 6/30/2019 32200.00 27860.53 (4,339.47) 4344.76 920000.00 924344.76 12/31/2019 32200.00 27855.24 (4,344.76) 0.00 920000.00 920000.00 Journal entry Date Account Debit Credit 1/1/2015 Cash 959146 Bonds Payable 920000 Premium on Bonds Payable 39146 6/30/2015 Interest Expenses 28774.38 Premium on Bonds Payable 3425.62 Cash 32200 12/31/2019 Interest Expenses 27855.24 Premium on Bonds Payable 4344.76 Cash 32200 12/31/2019 Bonds Payable 920000 Cash 920000Related Questions
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