Grove Corporation issued $1,500,000 of 7%, 20 year bonds on January 1, 2016. The
ID: 2469605 • Letter: G
Question
Grove Corporation issued $1,500,000 of 7%, 20 year bonds on January 1, 2016. The interest is to be paid annually on January 1. The bonds were sold to yield 8%. Grove Corporation closes its books annually on December 31. The corporation paid $75,000 of issue costs when the bonds were issued.
Instructions
(a) Determine the issue price of the bonds (before deducting for bond issued costs).
Issue Price of Bonds:
$
Supporting Calculation:
(b) Prepare all necessary entries for the following dates. Use straight-line amortization for the any premium or discount and the bond issue costs. May or may not need all lines.
Accounts
Debit
Credit
1/1/2016
12/31/2016
(c) Show the proper balance sheet presentation for all bond related accounts that would appear on the balance sheet as of 12/31/16.
Issue Price of Bonds:
$
Explanation / Answer
Answer
Answer a
Figures in $
Year
Interest
Redemption price
Cash flow
Disc rate : 8%
Present value
A
B
C
D
1500000*0.07
A+B
C*D
1
105000
105000
0.93
97222.22
2
105000
105000
0.86
90020.58
3
105000
105000
0.79
83352.39
4
105000
105000
0.74
77178.13
5
105000
105000
0.68
71461.24
6
105000
105000
0.63
66167.81
7
105000
105000
0.58
61266.49
8
105000
105000
0.54
56728.23
9
105000
105000
0.50
52526.14
10
105000
105000
0.46
48635.32
11
105000
105000
0.43
45032.70
12
105000
105000
0.40
41696.94
13
105000
105000
0.37
38608.28
14
105000
105000
0.34
35748.41
15
105000
105000
0.32
33100.38
16
105000
105000
0.29
30648.50
17
105000
105000
0.27
28378.24
18
105000
105000
0.25
26276.15
19
105000
105000
0.23
24329.77
20
105000
1500000
1605000
0.21
344349.87
Issue price of bonds
1352727.79
Answer (b)
Figures in $
Opening Carrying balance
Cash interest
Effective interest 8%
Discount Amortisation
Closing Carrying balance
A
B
C
D
A*0.08
C-B
A+D
2016
1352727.79
105000
108218.2
3218.223
1355946.01
Journal Entries
01/01/2016
Cash A/c Dr. $ 1352727.79
To Bonds payable A/c Cr. $ 1352727.79
Issue Expenses A/c Dr. $ 75,000
To Cash A/c Cr. $75,000
31/12/2016
Interest Expenses A/c Dr. 108218.2
To Bonds payable A/c Cr. 3218.2
To interest payable A/c Cr. 105000
Answer C
Balance sheet as on 31/12/2016
Figures in $
Liabilities
Amount
Assets
Amount
Bonds payable
1355946.01
Interest payable
105000
Figures in $
Year
Interest
Redemption price
Cash flow
Disc rate : 8%
Present value
A
B
C
D
1500000*0.07
A+B
C*D
1
105000
105000
0.93
97222.22
2
105000
105000
0.86
90020.58
3
105000
105000
0.79
83352.39
4
105000
105000
0.74
77178.13
5
105000
105000
0.68
71461.24
6
105000
105000
0.63
66167.81
7
105000
105000
0.58
61266.49
8
105000
105000
0.54
56728.23
9
105000
105000
0.50
52526.14
10
105000
105000
0.46
48635.32
11
105000
105000
0.43
45032.70
12
105000
105000
0.40
41696.94
13
105000
105000
0.37
38608.28
14
105000
105000
0.34
35748.41
15
105000
105000
0.32
33100.38
16
105000
105000
0.29
30648.50
17
105000
105000
0.27
28378.24
18
105000
105000
0.25
26276.15
19
105000
105000
0.23
24329.77
20
105000
1500000
1605000
0.21
344349.87
Issue price of bonds
1352727.79
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