when Patey Pontoons issued 4% bonds on January 1, 2018, with a face amount of $6
ID: 2336366 • Letter: W
Question
when Patey Pontoons issued 4% bonds on January 1, 2018, with a face amount of $660,000, the market yield for bonds of similar risk and maturity was 5%. The bonds mature December 31, 2021 (4 years). Interest is paid semiannually on June 30 and December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required 1. Determine the price of the bonds at January 1, 2018. 2. Prepare the journal entry to record their issuance by Patey on January 1, 2018. 3. Prepare an amortization schedule that determines interest at the effective rate each period. 4. Prepare the journal entry to record interest on June 30, 2018. 5. What is the amount related to the bonds that Patey will report in its balance sheet at December 31, 2018? 6. What is the amount related to the bonds that Patey will report in its income statement for the year ended December 31, 2018? (lgnore income taxes.) 7. Prepare the appropriate journal entries at maturity on December 31, 2021Explanation / Answer
1) Face Value $660,000.00 Rate = 5%/2 0.025 Period = 4 x2 8 Coupon Rate (semiannual) = 4%/2 0.02 Coupon Payment (semiannual) $13,200.00 PV of interest: Table 4, 8 payments @ 2.5% = $13,200 x 7.1701 $94,645.81 PV of Face = Table 2, 8 periods @ 2.5%= $660,000 x 0.8207 $541,692.7367 Value of Bond = $94,645.81 + $541,692.7367 $636,338.55 2) To record their issuance by the Patey on January 1, 2018. Debit Credit Cash $636,338.55 Discount on B/P $23,661.45 Bonds Payable $660,000.00 3) Amortization schedule that determines interest at the effective rate each period. Date Cash Interest 2% x $660,000 Effective Interest 2.5% x Ending balance Discount Amortisation Outstanding Balance 1/1/18 $636,338.55 6/30/18 $13,200.00 $15,908.46 $2,708.46 $639,047.01 12/31/18 $13,200.00 $15,976.18 $2,776.18 $641,823.19 6/30/19 $13,200.00 $16,045.58 $2,845.58 $644,668.77 12/31/19 $13,200.00 $16,116.72 $2,916.72 $647,585.49 6/30/20 $13,200.00 $16,189.64 $2,989.64 $650,575.12 12/31/20 $13,200.00 $16,264.38 $3,064.38 $653,639.50 6/30/21 $13,200.00 $16,340.99 $3,140.99 $656,780.49 12/31/21 $13,200.00 $16,419.51 $3,219.51 $660,000.00 4) To record the interest on June 30, 2018 Interest Expense $15,908.46 Discount on B/P $2,708.46 Cash $13,200.00 5) Balance sheet at December 31, 2018 Bonds Payable $660,000.00 Discount on B/P (660,000 – 641,823.19) -$18,176.81 $641,823.19 6) Income statement for the year ended December 31, 2018 Interest Expenses = $15908.46+15976.18 $31,884.64 7) journal entries at maturity on December 31, 2021 Interest Expense $16,419.51 Discount on B/P $3,219.51 Cash $13,200.00 Bonds Payable $660,000.00 Cash $660,000.00
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