when Patey Pontoons issued 8 bonds on January 1 2018 with a

when Patey Pontoons issued 8% bonds on January 1, 2018, with a face amount of $700,000, the market yield for bonds of similar risk and m aturity was 9% The bonds mature December 31, 2021 (4 years). Interest is paid semiannually on June 30 and December 31 PV of S1, PV of S1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $) (Use appropriate factor(s) from the tables provided.) Required: 1. Determine thé 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 ill report in its income statement for the year ended December 31, 2018? (Ignore income taxes.) 7. Prepare the appropriate journal entries at maturity on December 31, 2021

Solution

principal 700,000 interest paid on bonds 700,000*4%= 28000 For Principal use PV of $1 table at 4.5% for 8 years for interest use PV of ordinary annuity table at 4.5% for 8 years 1) Calculation of bonds issue price table values are based on n= 8 i= 4.50% Cash flow Amount PV principal 700,000 492233 (700,000*.70319=492233) interest expense 28000 184685 (28000*6.59589=184,685) price of bonds 676918 (please use factor table as given in your question ) 2) Date Accoounting titles & Explanations Debit Credit 1/1/2018 Cash 676918 Discount on bonds payable 23,082 Bonds payable 700,000 3) interest cash bond discount carring period interest interest amortizatioon value end expense 4.50% 1/1/2018 676918 6/30/2018 28000 30461 2461 679379 12/31/2018 28000 30572 2572 681951 6/30/2019 28000 30688 2688 684639 12/31/2019 28000 30809 2809 687448 6/30/2020 28000 30935 2935 690383 12/31/2020 28000 31067 3067 693450 6/30/2021 28000 31205 3205 696656 12/31/2021 28000 31344 3344 700000 total 224000 247082 23082 4) Date Accoounting titles & Explanations Debit Credit 30/6/2018 interest expense 30461 Discount on bonds 2461 cash 28000 5) Balance sheet (partial)2018 681951 6) income statement 61033 (sum of interest expense) 7) Date Accoounting titles & Explanations Debit Credit 12/31/2021 interest expense 31344 Discount on bonds 3344 cash 28000 bonds payable 700,000 cash 700,000