20. OnJanuary 1, 2016, Maia Enterprises issued 10% bonds dated January 1, 2016,

Question

20. OnJanuary 1, 2016, Maia Enterprises issued 10% bonds dated January 1, 2016, with a face amount of $19.9 million. The bonds mature in 2025 (10 years). For bonds of similar risk and maturity, the market yield is 8% interest is paid seriannually on June 30 and December 31. (ryoS. PyoS·EAofS1. Pa of $1. FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided. Enter your answers in whole dollars.) 1. Determine the price of the bonds at January 1, 2016. 2. Prepare the journal entry to record the bond issuance by Mania on January 1, 2016. (If no entry ls required for a transactionievent , select "No journal entry required" in the first account field.) View transaction list Journal entry worksheet Record the issuance of bonds by Mania. Note: Enter debits before crecits Date January 01. 2016 General Journal Debit Credit esc FI F3 F4 FS F7

Explanation / Answer

1. Price of Bonds = Present Value of Interest Stream + PV of redemption value

Semi annual interest = 0.05*19.90 = 0.995

Number of period = 10*2 = 20

Discounting rate = Yield on similar bonds /2 = 8/2 = 4 %

Bond price = 0.995*Present Value of Annuity Factor (20 periods, 4%) + 19.90* Present Value Factor ( 20 periods, 4%)

Bond Price = 0.995*13.5904 + 19.90*0.4564 = 13.5224+ 9.0824

Bond Price = 22.6048

2. Journal Entry on Issue

Cash A/c Dr. 19.90 million

To Bonds Payable A/c 19.90 million

3. Effective interest rate = 1.005^2 - 1 = 1.1025-1 = 0.1025 = 10.25%

Annual interest = 0.1025*19.90 = 2.03975 million

Semi annual interest = 2.03975/2 = 1.019875 million

Journal Entry on June 30,2016

Interest on Bonds Payable A/c Dr. 1.019875 million

To Cash A/c 1.019875 million

4. Journal entry will be same as above

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