.Grove Corporation issued $1,500,000 of 7%, 20 year bonds on January 1, 2016. Th
ID: 2470000 • Letter: #
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.
(a) Determine the issue price of the bonds (before deducting for bond issued costs).
(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.
Explanation / Answer
(a)
Annual Interest payment = $1500000 x 7% = $105000
Issue Price
= Interest x PVIFA(8%, 20) + $1500000 x PVIF (8%, 20)
= $105000 x 9.81814 + $1500000 x 0.21455
= $1352730
(b)
Discount on Bonds Payable = $1500000 - $1352730 = $147270
Amortization per year = 147270 / 20 = $7364
Amortization of issue costs = $75000 / 20 = $3750
Interest Expense = Interest payable + amortization of bond discount = $105000 + $7364 = $112364
(b)
Note:
The entries of Dec 31, Jan16 and Jan1, 2017 will be repeated for each year upto year 2036
Date AccounTitle and Explanations Debit($) Credit($) 2016 Jan-01 Cash 1352730 Discount on bonds payable 147270 Bonds payable 1500000 (issue of bond recorded) Bond Issue cost 75000 cash 75000 (issuance cost recorded) Dec-31 Interest Expense 112364 Discount on Bonds Payable 7364 Interest payable 105000 (interest expnense accrued and recorded) Issue expenses 3750 Bond Issue Cost 3750 (amortization of issue expenses) 2017 Jan-01 Interest payable 105000 Cash 105000 (Interest paid to the bond holders) 2037 Jan-01 Interest payable 105000 Cash 105000 (Interest paid to the bond holders) Baonds Payable 1500000 Cash 1500000 (Bonds are retired on maturity date)Related Questions
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