On July 1, 2016, Plaza Ventures, Inc. issued $3,000,000 of 7% bonds, due in 10 y

Question

On July 1, 2016, Plaza Ventures, Inc. issued $3,000,000 of 7% bonds, due in 10 years, with interest payable semiannually on July 1 and January 1. At the time of issue, the market rate for such bonds is 5%.

A. Prepare the journal entry to record issuance of these bonds.

B. Assuming Plaza uses the effective interest method of amortization, prepare the journal entries to

a. Accrue interest on December 31, 2016

b. Pay interest on January 1, 2017

c. Pay interest on July 1, 2017

d. Accrue interest on December 31, 2017

e. Pay interest on January 1, 2018

C. What is the total amount of interest expense that Plaza should report on its 2016 and 2017 income statements?

D. What is the total amount of cash that Plaza will pay bondholders in 2016? In 2017?

E. How should these bonds be presented on Plaza’s 2016 and 2017 balance sheets?

F. Assuming Plaza instead uses the straight line method of amortization, what amount of interest expense will be reported in 2016? 2017?

G. Assume Plaza uses the straight line method of amortization and recalls all of the bonds at 102 on January 2, 2017. Prepare the journal entry to record this transaction.

Caution: work that is not clearly labeled (e.g. (a), (b)) will not be graded. Work without supporting computations will receive no credit.

Explanation / Answer

Face Value of the bond $ 3,000,000.00 Semi annual payment $      105,000.00 Duration 10 Frequency 2 market interest rate 5% Present value of the bond in excel= PV(5%/2,10*2,105000,3000000) Present value of the bond= $3,467,674.87 Given the current market rate of 5.000% for a similar bond, a bond with a face value of $3,000,000.00 and paying a coupon rate of 7.000% (compounding Semi-Annually), should be selling for $3,467,674.87 (selling at a premium). A. Prepare the journal entry to record issuance of these bonds. Journal Entry to record the issuance of the bond Cash A/c Dr. $3,467,674.87 Bonds Payable A/c cr $ 3,000,000.00 Premium on Bond Payable A/c Cr $467,674.87 A B C D E F G Date Interest payment stated 3.5% * Face value Interest Exp Market 2.5% * Previous book value in G Amortization of Bond Premium (B-C) Credit Balance in Bond Premium account Credit balance in Bond payable account Book value of the bond (F+E) Credit Cash Debit Interest expenses Debit Bond Premium 01/07/2016 $467,674.87 $ 3,000,000.00 $3,467,674.87 31/12/2016 $      105,000.00 $86,691.87 $ 18,308.13 $449,366.74 $ 3,000,000.00 $3,449,366.74 30/06/2017 $      105,000.00 $86,234.17 $ 18,765.83 $430,600.91 $ 3,000,000.00 $3,430,600.91 31/12/2017 $      105,000.00 $85,765.02 $ 19,234.98 $411,365.93 $ 3,000,000.00 $3,411,365.93 30/06/2018 $      105,000.00 $85,284.15 $ 19,715.85 $391,650.08 $ 3,000,000.00 $3,391,650.08 31/12/2018 $      105,000.00 $84,791.25 $ 20,208.75 $371,441.33 $ 3,000,000.00 $3,371,441.33 a. Accrue interest on December 31, 2016 Interest Exp A/c Dr. $86,691.87 Premium on Bond Payable A/c Dr $        18,308.13 Interest Payable A/c Cr $      105,000.00 b. Pay interest on January 1, 2017 Interest Payable A/c Dr $      105,000.00 Cash A/c Cr $      105,000.00 c. Pay interest on July 1, 2017 Interest Payable A/c Dr $      105,000.00 Cash A/c Cr $      105,000.00 d. Accrue interest on December 31, 2017 Interest Exp A/c Dr. $85,765.02 Premium on Bond Payable A/c Dr $        19,234.98 Interest Payable A/c Cr $105,000.00 e. Pay interest on January 1, 2018 Interest Payable A/c Dr $      105,000.00 Cash A/c Cr $      105,000.00 C. What is the total amount of interest expense that Plaza should report on its 2016 and 2017 income statements? June December Total 2017 $86,234.17 $85,765.02 $171,999.19 2018 $85,284.15 $84,791.25 $170,075.40 D. What is the total amount of cash that Plaza will pay bondholders in 2016? In 2017? June December Total 2017 $      105,000.00 $      105,000.00 $210,000.00 2018 $      105,000.00 $      105,000.00 $210,000.00 E. How should these bonds be presented on Plaza’s 2016 and 2017 balance sheets? 2017 2018 Bond Payable account $ 3,000,000.00 $ 3,000,000.00 Premium on bond payable account $411,365.93 $371,441.33 Book value $ 3,411,365.93 $ 3,371,441.33 Table for straignt line method A B C D E F G Date Interest payment stated 3.5% * Face value Amortization of Bond Premium Interest Expenses( B-C) Credit Balance in Bond Premium account Credit balance in Bond payable account Book value of the bond (F+E) Credit Cash Debit Bond Premium Debit Interest Expenses 01/07/2016 $467,674.87 $ 3,000,000.00 $3,467,674.87 31/12/2016 $      105,000.00 $23,383.74 $ 81,616.26 $386,058.61 $ 3,000,000.00 $3,386,058.61 30/06/2017 $      105,000.00 $23,383.74 $ 81,616.26 $304,442.36 $ 3,000,000.00 $3,304,442.36 31/12/2017 $      105,000.00 $23,383.74 $ 81,616.26 $222,826.10 $ 3,000,000.00 $3,222,826.10 30/06/2018 $      105,000.00 $23,383.74 $ 81,616.26 $141,209.84 $ 3,000,000.00 $3,141,209.84 31/12/2018 $      105,000.00 $23,383.74 $ 81,616.26 $59,593.59 $ 3,000,000.00 $3,059,593.59 F. Assuming Plaza instead uses the straight line method of amortization, what amount of interest expense will be reported in 2016? 2017? June December Total 2017 $        81,616.26 $        81,616.26 $163,232.51 2018 $        81,616.26 $        81,616.26 $163,232.51 G. Assume Plaza uses the straight line method of amortization and recalls all of the bonds at 102 on January 2, 2017. Prepare the journal entry to record this transaction. carrying book value of bond on 02-01-2017 $3,386,058.61 Redeeded at (3000000*102%) $ 3,060,000.00 Gain on retirement of bond $326,058.61 Bond Payable account dr $ 3,000,000.00 Premium on bond payable account dr $386,058.61 cash account cr $ 3,060,000.00 Gain on Retirement of bond $      326,058.61

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

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