On June 1, 2009, Everly Bottle Company sold $1,000,000 in long-term bonds for $8

Question

On June 1, 2009, Everly Bottle Company sold $1,000,000 in long-term bonds for $877600. Thebonds will mature in 10 years and have a stated interest rate of 8% and a yield rate of 10%. Thebonds pay interest annually on May 31 of each year. The bonds are to be accounted for under the effective-interest method.On June 1, 2009, Everly Bottle Company sold $1,000,000 in long-term bonds for $877,600. Thebonds will mature in 10 years and have a stated interest rate of 8% and a yield rate of 10%. Thebonds pay interest annually on May 31 of each year. The bonds are to be accounted for under the effective-interest method.

Instructions

(a)Construct a bond amortization table for this problem to indicate the amount of interestexpense and discount amortization at each May 31. Include only the first four years. Makesure all columns and rows are properly labeled. (Round to the nearest dollar.)(b)The sales price of $877,600 was determined from present value tables. Specifically explainhow one would determine the price using present value tables.(c)Assuming that interest and discount amortization are recorded each May 31, prepare theadjusting entry to be made on December 31, 2011. (Round to the nearest dollar.)

Explanation / Answer

revised JV entry

a. EVERy Bottle company Details AMT $ Bond Face value                        1,000,000 Market Price                            877,600 Intereat rate stated 8% Annual Interest payable                              80,000 Effective Interest rate 10% Amortization Schedules Date Interest Payable Cr Interest Expense @10% Dr Discount Amortization Cr Book Value Bond Cr May 31 ,2009               877,600 May 31 ,2010                              80,000                      87,760                    7,760               885,360 May 31 ,2011                              80,000                      88,536                    8,536               893,896 May 31 ,2012                              80,000                      89,390                    9,390               903,286 May 31 ,2013                              80,000                      90,329                  10,329               913,614 b. Discounting cash flows with PV factor for getting Bond Price today Date Cash Flow Dsicount factor @10% May 31 ,2010                              80,000                        0.909              72,720.0 May 31 ,2011                              80,000                        0.826              66,080.0 May 31 ,2012                              80,000                        0.751              60,080.0 May 31 ,2013                              80,000                        0.683              54,640.0 May 31 ,2014                              80,000                        0.621              49,680.0 May 31 ,2015                              80,000                        0.564              45,120.0 May 31 ,2016                              80,000                        0.513              41,040.0 May 31 ,2017                              80,000                        0.467              37,360.0 May 31 ,2018                              80,000                        0.424              33,920.0 May 31 ,2019                        1,080,000                        0.386            416,880.0               877,520 The calculation above shows the use of PV factor for each years cash flow to get   discounted PV . Thus the total of dicunted PV of interest and maturity value using PV factors for each year @10% gives the Bond price today c. Journal Entry Date Account Title Dr $ Cr $ Dec 31. 2011. Interest Payable                      80,000 Interest Expense                              88,536 Bond Discount                          8,536

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