On january 1,2014, Lowry Co. issued five- year bonds with a face value of $200,0
ID: 2597376 • Letter: O
Question
On january 1,2014, Lowry Co. issued five- year bonds with a face value of $200,000 and a stated interest rate of 10%, payable semiannually on july 1 and January 1. The bonds were sold to yield 12%. The firm uses the effective- interest method of amortizing discounts and premiums.
A) Calculate the price of the bond in dollars
B) Calculate the price of the bond as percentage
C) Prepare the journal entry to record the issuance of the bonds.
D) On January 2,2015, Lowry Co retired $80,000 of these bonds at 98. Prepare the journal entries to record the retirement.
E)On January 2,2015, Lowry Co, converted $ 50,000 of these bonds to its $5 par value common stocks. Each Bonds is convertible to 100 shares of common stocks.Prepare the journal entries to record the conversion.
Explanation / Answer
A) Interest payments = $200,000*10%*6/12 = $10,000
Effective interest rate for discounting = 12%*6/12 = 6%
No. of periods = 5 years*2 = 10
Price of Bonds = Present value of Principal + Present value of interest payments
= [PVF(6%,10)*$200,000] + [PVAF(6%,10)*$10,000]
= (0.5584*200,000)+(7.3601*10,000) = 111,680+73,601 = $185,281
B) Bond price in Percentage = Bond Price/Face value = (185,281/200,000)*100 = 92.64%
C) Journal Entries (Amount in $)
D) Journal Entries (Amount in $)
E) Journal Entries (Amount in $)
Working Note :
It is assumed that face value of one bond is $1,000 and total bonds converted is (50,000/1,000) 50. Total converted shares are (50 bonds*100 shares) 5,000 shares with par value of $5. Thus total par value will be $25,000 (5,000*$5) and the balance of $25,000 will be additional paid in capital.
Date Account Titles and explanations Debit Credit Jan. 1, 2014 Cash 200,000 Bonds Payable 200,000 (To record the issuance of Bonds)Related Questions
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