Question

On January 1, 2020, Pharoah Corporation purchased a newly issued $1,525,000 bond. The bond matured on December 31, 2022, and paid interest at 6% every June 30 and December 31. The market interest rate was 8%. Pharoah’s fiscal year-end is October 31, and the company had the intention and ability to hold the bond until its maturity date. The bond will be accounted using the amortized cost model.

1. Calculate the price paid for the bond using a financial calculator or Excel functions. (Round answers to 2 decimal places, e.g. 52.75.)

2.

.
Prepare an amortization schedule for the bond. (Round answers to 2 decimal places, e.g. 52.75.) Cash Interest Discount Amortized Cost Received (Present Value) Date Revenue Amortization Jan. 1, 2020 $ $ June 30, 2020 Dec. 31, 2020 June 30, 2021 Dec. 31, 2021 June 30, 2022 Dec. 31, 2022

3.

Answer 1

1.

Computation of bond price
Table values are based on:
n=	6
i=	4%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.79031	$1,525,000	$ 1,205,229.65
Interest (Annuity)	5.24214	$45,750	$    239,827.76
Price of bonds			$1,445,057.41

2.

Bond Amortization Schedule
Date	Interest received	Interest revenue (4%)	Discount Amortized	Unamortized Discount	Carrying Value
1-Jan-20				$79,943	$1,445,057
30-Jun-20	$           45,750.00	$       57,802.30	$      12,052.30	$     67,890.29	$           1,457,109.71
31-Dec-20	$           45,750.00	$       58,284.39	$      12,534.39	$     55,355.90	$           1,469,644.10
30-Jun-21	$           45,750.00	$       58,785.76	$      13,035.76	$     42,320.14	$           1,482,679.86
31-Dec-21	$           45,750.00	$       59,307.19	$      13,557.19	$     28,762.94	$           1,496,237.06
30-Jun-22	$           45,750.00	$       59,849.48	$      14,099.48	$     14,663.46	$           1,510,336.54
31-Dec-22	$           45,750.00	$       60,413.46	$      14,663.46	$               0.00	$           1,525,000.00

3.

Journal Entries
Date	Particulars	Debit	Credit
1-Jan-20	Bond Investment at amortized cost Dr	$ 1,445,057.41
	To Cash		$ 1,445,057.41
	(To record bond investment)
30-Jun-20	Cash Dr	$       45,750.00
	Bond Investment at amortized cost Dr	$       12,052.30
	To Interest Income		$      57,802.30
	(To record interest revenue)
31-Oct-20	Interest receivables Dr	$       30,500.00
	Bond Investment at amortized cost Dr	$          8,356.26
	To Interest Income		$      38,856.26
	(To record accrued interest)
31-Dec-21	Cash Dr	$       45,750.00
	Bond Investment at amortized cost Dr	$          4,178.13
	To Interest Income		$      19,428.13
	To Interest receivables		$      30,500.00
	(To record interst received)
31-Dec-22	Cash Dr	$       25,612.18
	Bond Investment at amortized cost Dr ($13,898*2/6)	$          4,887.82
	To Interest Income ($569,648*2/6)		$      20,137.82
	To Interest receivables		$      30,500.00
	(To record interest revenue )
31-Dec-22	Cash Dr	$ 1,525,000.00
	To Bond Investment at amortized cost		$ 1,525,000.00
	(To record maturity proceed)