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P&J sells $500,000 of 10% bonds on Nov 1, 2014. The bonds pay interest on May 1 and Nov 1 and are to yield 12%. The due date of the bonds is May 1, 2018. The accounting period is the calendar year. Premium or discount is to be amortized at interest dates and at year-end. Compute the price of the bonds at the issuance date Prepare the amortization schedule Prepare entries for 2014, 2015 and May 1, 2016

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It is reasonable that a bond promising to pay only 10% interest will sell for discount i.e less than its face value when the market is expecting to earn 12% Present value of bond to be issued Bond Rate Market rate Face Value or Maturity Value Present Value of Bond Market Value Life Discount 10.00% Semiannual 5.00% 6.00% 12.00% semiannual 500,000 472,090 472,090 3.5 Semiannual 27,910 The PV of the Bond-PV of Interests+PV of Bond Maturity Value PV of Interest Interest Payment-Cou Annuity Factor (1-(1+r)A-N)r r-Market Rate pon Rate FV 25,000 5.58238 6.00% The Present Value of Interest 139,560 PV of Bond Maturity Value-Face Value PV factor for N Face Value or Maturity Value PV factor-1/(1+)AN 500,000 0.66506 Present Value 332,530 Present Value of Bond 472,090 472,090 Round offAmortisation Schedule Interest Expense (Market rate previous book value in G) Effective Credit Debit Balance in balance in Interest rate Amortisation of Bond Bond Discount bond payable Date Interest Pa nt (Coupon Rate F method Discount [C-B] Account account Book Value of Bond 1-Nov-14 27,910 24,585 25,000 25,000 25,000 25,000 25,000 25,000 25,000 28,325 28,525 28,736 28,961 29,198 29,450 29,714 3,325 3,525 3,736 3,961 4,198 4,450 4,714 500,000 500,000 500,000 500,000 500,000 500,000 500,000 500,000 472,090 475,415 478,940 482,677 486,637 490,836 1-Nov-15 17,323 13,363 9,164 4,714 1-Nov-16 1-Nov-17 500,000 175,000 202,910 27,910 Journal Ent Debit Credit 1-Nov-14 Cash 472,090 27,910 Discount on Bond Payable Bond Payable 500,000 31-Dec-14 Interest expense 9,442 Discount on Bond Payable Interest Pavable 8,333 1-May-15 Interest Payable 8,333 18,884 Interest expense Discount on Bond Payable Cash 2217 25000 1-Nov-15 Interest expense 28,525 Discount on Bond Payable Cash 3,525 25,000 31-Dec-15 Interest expense 9,579 Discount on Bond Payable 1,245 8,333 Interest Payable 1-May-16 Interest Payable 8,333 19,158 Interest expense Discount on Bond Payable Cash 2,491 25,000

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