PART A Dantonio Company issued five-year, 7% bonds with a total face value of $5
ID: 2467824 • Letter: P
Question
PART A
Dantonio Company issued five-year, 7% bonds with a total face value of $500,000 on January 1, 2014. Interest is paid annually on December 31. The market rate of interest on this date was 9%. Dantonio uses the effective interest rate method.
Required:
Determine the proceeds of the bond sale on 1/1/14. Explain your method of calculation.
Did this bond sell at a premium or discount? In 1-2 sentences explain why it sold at a premium or discount.
Using Excel, prepare a five-year bond amortization schedule for these bonds. Use formulas and reference cells in Excel to show how you calculate your numbers.
Prepare journal entries to record (1) the sale of the bonds on January 1, 2014, (2) the interest payment for the period ended December 31, 2014 and, (3) the final interest and face value payment at maturity on December 31, 2018.
Show how the balance sheet would report the bond liability and related premium/discount on December 31, 2015.
PART B
Dantonio Company issued five-year, 7% bonds with a total face value of $920,000 on January 1, 2015. Interest is paid semi-annually onJune 30 and December 31. The market rate of interest on this date was 6%. Dantonio uses the effective interest rate method.
Required:
Determine the proceeds of the bond sale on 1/1/15. Explain your method of calculation.
Did this bond sell at a premium or discount? In 1-2 sentences explain why it sold at a premium or discount.
Using Excel, prepare a five-year bond amortization schedule for these bonds. Use formulas and reference cells in Excel to show how you calculate your numbers.
Prepare journal entries to record (1) the sale of the bonds on January 1, 2015, (2) the interest payment for the period ended June 30, 2015 and, (3) the final interest and face value payment at maturity on December 31, 2019.
Show how the balance sheet would report the bond liability and related premium/discount on December 31, 2016.
Explanation / Answer
Part A:
Market interest rate (r)= 9%
n= 5 (annual periods)
Present value of principle:
= $500,000 * PV factor for a single payment (9%, 5 periods)
= $500,000 * 0.64993
= $324,965
Calculation of present value of interest payment:
= $500,000 * 7%
= $35,000 (9%, 5 periods)
= $35,000 * 3.88965
= $136,138
Calculation of price of bond:
= PV of principle + PV of interest payments
= $324,965 + $136,138
= $461,103
The bond will be sold at a $38,897 ($500,000 - $461,103) discount from the face amount.
The bond will be sold at discount of $461,103 face value of $500,000 worth of bonds.
Using Excel, prepare a five-year bond amortization schedule for these bonds:
A
B
C
D
E
F
G
Date
Interest
payment
stated
7% * Face value
Interest expenses
Mkt 9%*Previous
BV in G
Amortization
of bond discount
C minus B
Debit balance
in the account
bond discount
Credit balance
in the account
Bonds payable
Book value
of the bonds
F minus E
Jan 1, 2014
$ 38,897
$ 500,000
$ 461,103
Dec31, 2014
$ 35,000
$ 41,499
$ 6,499
$ 32,398
$ 500,000
$ 467,602
Dec31, 2015
$ 35,000
$ 42,084
$ 7,084
$ 25,314
$ 500,000
$ 474,686
Dec31, 2016
$ 35,000
$ 42,722
$ 7,722
$ 17,592
$ 500,000
$ 482,408
Dec31, 2017
$ 35,000
$ 43,417
$ 8,417
$ 9,175
$ 500,000
$ 490,825
Dec31, 2018
$ 35,000
$ 44,174
$ 9,174
$ -
$ 500,000
$ 500,000
Prepare the Journal entries:
Date
Account title & explanation
Debit
Credit
Jan 1, 2014
Cash
$ 38,897
Discount on bonds payable
$ 461,103
Bonds payable
$ 500,000
(2)Interest payment for the period ended December 31, 2014:
Date
Account title & explanation
Debit
Credit
Dec 31, 2014
Interest expense
$ 41,499
Discount on bonds payable
$ 6,499
Cash
$ 35,000
(3)Final interest and face value payment at maturity on December 31, 2018:
Date
Account title & explanation
Debit
Credit
Dec 31, 2018
Bonds payable
$ 500,000
Interest expense
$ 44,174
Discount on bonds payable
$ 9,174
Cash
$ 535,000
A
B
C
D
E
F
G
Date
Interest
payment
stated
7% * Face value
Interest expenses
Mkt 9%*Previous
BV in G
Amortization
of bond discount
C minus B
Debit balance
in the account
bond discount
Credit balance
in the account
Bonds payable
Book value
of the bonds
F minus E
Jan 1, 2014
$ 38,897
$ 500,000
$ 461,103
Dec31, 2014
$ 35,000
$ 41,499
$ 6,499
$ 32,398
$ 500,000
$ 467,602
Dec31, 2015
$ 35,000
$ 42,084
$ 7,084
$ 25,314
$ 500,000
$ 474,686
Dec31, 2016
$ 35,000
$ 42,722
$ 7,722
$ 17,592
$ 500,000
$ 482,408
Dec31, 2017
$ 35,000
$ 43,417
$ 8,417
$ 9,175
$ 500,000
$ 490,825
Dec31, 2018
$ 35,000
$ 44,174
$ 9,174
$ -
$ 500,000
$ 500,000
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.