Question

E12-4

A,B,C,D,E,F,G

da bodo interest on and the F12-2 Juary 1 2004. bones Company On The bonds pay interest on was 5875,37 Required: the the c. Explain Was the market interest rate on January 1, 2004, s h coupon rate on the bonds e w Prepare the journal entry to issue the bonds Explain how an increase in market interest rates during 2006 will stic (1) Jones Company (2) The original bondholders who sell the bonds during 2006 (3) Investors who purchase the bonds during 2006 as 2-3 On January 1, 2004, AJ. .). Corporation issues a $10.000 bond with a 6% annual coupon The bond matures tive years from the date of issue. The hond is issued to wedan turn to investors, selling for $9,201.43. turn to Required: - 2. Prepare the journal entry to record the sale of the bond on January 1, 2004. b. How will the bond be presented on A.J.s balance sheet on January 1, 2004 Prepare the entry to record the first coupon payment on December 31, 2004. d. What will be the economic value of the bond on December 31, 2004, assuming to change in market interest rates? e How will the bond be presented on the balance sheet on December 31, 2004? f. What will be the amount of the net bond liability on December 31, 2008, the day be- fore the bond matures? g. Prepare the entry that will be made on January 1, 2009, the maturity date of the bond. F12-4 On January 1, 2004, P.J. Corporation issues a $5,000 bond with a 6% coupon. The bond matures in five years. The bond is issued to yield a 5% return to investors, selling for $5,216.49. Required: a. Prepare the journal entry to record the sale of the bond on January 1, 2004. b. How will the bond be presented on P.J.s balance sheet on January 1, 2004? c. Prepare the entry to record the first coupon payment on December 31, 2004.

Answer 1

Journal entry to record the sell of bond on January 1, 2004

Bank A/c                                            Dr.       $5,216.49

             To 6% Bond                                                              $5,216.49

Presentation of Bond in PJ's Balance Sheet

Non-current Liabilities :
Long-term Debt - 6% Bond                                $ 5,216.49

Journal entry to record First coupon Payment

Interest on Bond a/c                      Dr.            $ 300

              To Bank                                                              $ 300

Economic value of bond on December 31, 2004 assuming no change in market interest

300 * 0.943 (PVAF 6%, for 1 year) + 5000 * 0.943 (PVAF 6%, for 1 year)

= $ 4,998

Presentation of Bond in balance sheet on December 31, 2004

Non-current Liabilities :
Long-term Debt - 6% Bond                                $ 5,179 ($5,000 * PVF @ 5% for 4th year + $300 * PVAF @ 5% for 4years)

Net bond Liability on December 31,2008

$5,216.49 - $5,000 = $216.49