Question

c. Show how this note would be reported on Stephen Walker Company's December 31, Balance Sheet. 6. Luke Alvez Corporation issued $200,000 of 9 % bonds on November 1, 2016, due on November 1, 2021. The interest is to be paid twice a year on May 1 and November 1 The bonds were sold to yield 10% effective annual interest. Alvez Corporation closes its books annually on December 31 Required: (a) Prepare the entries for 2016 (with dates). Use the effective-interest amortization method. Based on the entries in part (a), indicate the amounts to be reported on the income statement, b) statement of cash flows, and liabilities section of the balance sheet for 2016.

Answer 1

first let us know the issue price of the bond:

[present value of annuity* interest payment] + [present value factor * face value]

here,

present value of annuity= [1-(1+r)^(-n)]/r

r = 10% per annum => 5% for six months =>0.05.

n=5 years*2=>10.

=>[1-(1.05)^(-10)]/0.05

=>0.3860868/0.05

=>7.721736

interest payment = $200,000*9%*6/12

=>$9,000.

present value factor = 1/(1+r)^n

=>1/(1.05)^10

=>0.6139135

face value =200,000

[7.721736*9000] + [0.6139135*200,000]

=>69,495.624+122,782.70

=>$192,278.324.

=>192,278....(rounded off)

a.Journal entries:

date	accounts	debit	credit
nov 1 2016	cash a/c	192,278
	Discount on bonds payable a/c	7,722
	.........To bonds payable a/c		200,000
dec 31 2016	Interest expense a/c	3,205
	........To Interest payable a/c		3,000
	........To discount on bonds payable a/c		205
	(interest expense = 192,278*10%*2/12=>$3205) (interest payable = 200,000*9%*2/12=>$3000)

b.

amount to be reported on	amount ($)
Income statement (interest expense)	3,205
statement of cash flows (amount received)	192,278
liabiities section of balance sheet:
bonds payable (200,000-7722+205)	192,483
interest payable	3,000