Homework SourseWhen Patey Pontoons issued a 6 bonds on January 1 2018 with
When Patey Pontoons issued a 6% bonds on January 1, 2018, with a face amount of 760,000, the market yield for bonds of similiar risk and maturity was 11%. The bonds mature December 31, 2021 (4 years). Interest is paid semiannually on June 30 and December 31.
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 on its income statement for the year ended December 31, 2018
7 Prepare the appropriate journal entries at maturity on December 31, 2021
Solution
1. bond price:
2. Journal
3. Amortisation schedule:
4. Interest on June 30.
5.
6. Income statement amount=
7. maturity entry:
| Particulars | Cash flow | Discount factor | Discounted cash flow | |
| Interest payments-Annuity (5.5%,8 periods) | 22,800.0 | 6.3346 | 1,44,428.10 | |
| Principle payments -Present value (5.5%,8 periods) | 7,60,000 | 0.6516 | 4,95,215.14 | |
| A | Bond price | 6,39,643.25 | ||
| Face value | 7,60,000 | |||
| Premium/(Discount) | -1,20,356.75 | |||
| Interest amount: | ||||
| Face value | 7,60,000 | |||
| Coupon/stated Rate of interest | 6.00% | |||
| Frequency of payment(once in) | 6 months | |||
| B | Interest amount | 760000*0.06*6/12= | 22800 | |
| Present value calculation: | ||||
| yield to maturity/Effective rate | 11.00% | |||
| Effective interest per period(i) | 0.11*6/12= | 5.50% | ||
| Number of periods: | ||||
| Ref | Particulars | Amount | ||
| a | Number of interest payments in a year | 2 | ||
| b | Years to maturiy | 4 | ||
| c=a*b | Number of periods | 8 |
