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Grove Corporation issued $1,500,000 of 7%, 20 year bonds on January 1, 2016. The

ID: 2469605 • Letter: G

Question

Grove Corporation issued $1,500,000 of 7%, 20 year bonds on January 1, 2016. The interest is to be paid annually on January 1. The bonds were sold to yield 8%. Grove Corporation closes its books annually on December 31. The corporation paid $75,000 of issue costs when the bonds were issued.

Instructions

(a) Determine the issue price of the bonds (before deducting for bond issued costs).

Issue Price of Bonds:

$

        Supporting Calculation:

(b) Prepare all necessary entries for the following dates. Use straight-line amortization for the any premium or discount and the bond issue costs. May or may not need all lines.

Accounts

Debit

Credit

1/1/2016

12/31/2016

(c) Show the proper balance sheet presentation for all bond related accounts that would appear on the balance sheet as of 12/31/16.

Issue Price of Bonds:

$

Explanation / Answer

Answer

Answer a

Figures in $

Year

Interest

Redemption price

Cash flow

Disc rate : 8%

Present value

A

B

C

D

1500000*0.07

A+B

C*D

1

105000

105000

0.93

97222.22

2

105000

105000

0.86

90020.58

3

105000

105000

0.79

83352.39

4

105000

105000

0.74

77178.13

5

105000

105000

0.68

71461.24

6

105000

105000

0.63

66167.81

7

105000

105000

0.58

61266.49

8

105000

105000

0.54

56728.23

9

105000

105000

0.50

52526.14

10

105000

105000

0.46

48635.32

11

105000

105000

0.43

45032.70

12

105000

105000

0.40

41696.94

13

105000

105000

0.37

38608.28

14

105000

105000

0.34

35748.41

15

105000

105000

0.32

33100.38

16

105000

105000

0.29

30648.50

17

105000

105000

0.27

28378.24

18

105000

105000

0.25

26276.15

19

105000

105000

0.23

24329.77

20

105000

1500000

1605000

0.21

344349.87

Issue price of bonds

1352727.79

Answer (b)

Figures in $

Opening Carrying balance

Cash interest

Effective interest 8%

Discount Amortisation

Closing Carrying balance

A

B

C

D

A*0.08

C-B

A+D

2016

1352727.79

105000

108218.2

3218.223

1355946.01

Journal Entries

01/01/2016

Cash A/c Dr. $ 1352727.79

             To Bonds payable A/c Cr. $ 1352727.79

Issue Expenses A/c Dr. $ 75,000

                       To Cash A/c Cr. $75,000

31/12/2016

Interest Expenses A/c Dr. 108218.2

                        To Bonds payable A/c Cr. 3218.2

                        To interest payable A/c Cr. 105000

Answer C

Balance sheet as on 31/12/2016

Figures in $

Liabilities

Amount

Assets

Amount

Bonds payable

1355946.01

Interest payable

105000

Figures in $

Year

Interest

Redemption price

Cash flow

Disc rate : 8%

Present value

A

B

C

D

1500000*0.07

A+B

C*D

1

105000

105000

0.93

97222.22

2

105000

105000

0.86

90020.58

3

105000

105000

0.79

83352.39

4

105000

105000

0.74

77178.13

5

105000

105000

0.68

71461.24

6

105000

105000

0.63

66167.81

7

105000

105000

0.58

61266.49

8

105000

105000

0.54

56728.23

9

105000

105000

0.50

52526.14

10

105000

105000

0.46

48635.32

11

105000

105000

0.43

45032.70

12

105000

105000

0.40

41696.94

13

105000

105000

0.37

38608.28

14

105000

105000

0.34

35748.41

15

105000

105000

0.32

33100.38

16

105000

105000

0.29

30648.50

17

105000

105000

0.27

28378.24

18

105000

105000

0.25

26276.15

19

105000

105000

0.23

24329.77

20

105000

1500000

1605000

0.21

344349.87

Issue price of bonds

1352727.79