On January 1 2019 Gleason Corp issued 700000 8 bonds payable

On January 1, 2019, Gleason Corp. issued $700,000, 8% bonds payable to finance company expansion. The bonds were dated January 1, 2019 and mature in four years on January 1, 2023. The bonds pay interest semi-annually each June 30th and December 31st. At the time of issuance, the market rate of interest for similarly risky investments was 6%.

1. At what amount were the bonds issued on January 1, 2019?

2. Prepare an amortization schedule for the life of the bonds using the effective interest method of amortization.

3. Assuming Gleason Corp.’s fiscal year ends May 31st, prepare all necessary entries written during the calendar year 2019 (i.e. from January 1, 2019 through December 31, 2019) related to the bonds.

4. Gleason retired 25% of the bonds on January 1, 2021. Prepare the entry for the retirement, assuming the bonds were retired at 102.

Check figures

Q1, Issue Price: $749,138

Q4, Gain on Bond Retirement: $ 3,005

please show work, thank you!!

Solution

Gleason Corp. Year to maturity =n=4*2 8 1) Coupon Rate=8%/2 4.0% Coupon Amount=(PMT)=($700000*4%) $           28,000.00 Fair value $         700,000.00 Yield to maturity= i=6%/2 3% Present Value in excel(=PV(I,n,PMT,FV)) PV(3%,8,28000,700000) Present Value ($749,137.85) In case of semiannual payment: Period double and interest rate will be half. 2) Bonds Amortization schedule Date Interest Payment(Face Value *4%) Interest Expense(Book Value *3%) Amortization of bonds premium(Interest Payment-Interest Expense) ( A )Credit balance in bonds premium account(Bond premium-Amortization of bonds premium) (B )Credit balance in bonds payable account (A)+(B) Book value of bonds 1/1/2019 $        49,138.00 $        700,000.00 $                                749,138.00 30/06/2019 $                                                         28,000.00 $           22,474.14 $                     5,525.86 $        43,612.14 $        700,000.00 $                                743,612.14 31/12/2019 $                                                         28,000.00 $           22,308.36 $                     5,691.64 $        37,920.50 $        700,000.00 $                                737,920.50 30/06/2020 $                                                         28,000.00 $           22,137.62 $                     5,862.38 $        32,058.12 $        700,000.00 $                                732,058.12 31/12/2020 $                                                         28,000.00 $           21,961.74 $                     6,038.26 $        26,019.86 $        700,000.00 $                                726,019.86 3) Journal Entries a) Date Particular Amount(DR) Amount(CR) 1/1/2019 Cash A/c $         749,138.00    To Bonds Payable $                700,000.00    To Premium on Bonds Payable $                   49,138.00 (Being amount of Bonds issued at a premium of $49138) b) 30/06/19 Interest Expense $           22,474.14 Premium on Bonds Payable $             5,525.86        To Cash $                   28,000.00 (Being amount of Interest Paid semi annually) c ) 31/12/19 Interest Expense $           22,308.36 Premium on Bonds Payable $             5,691.64        To Cash $                   28,000.00 (Being amount of Interest Paid semi annually) 4) Bonds book Value $726019.86*25%= $         181,504.97 Bonds Retirment price $700000*102/100*25%= $         178,500.00 Gain on retirement $             3,004.97