Question

for A, B - record journal entries

for C, D, E - record journal entries and AMORTIZATION schedules

Luna's Feather Pillows, Inc. is owned by Luna the Cat. As everyone who has a cat knows, they own what is in their space. Luna the Cat personally selects the feathers for each pillow when she is in the mood to do some work. Otherwise, she hangs out at the milk bar. All transactions in this packet relate to Luna's Feather Pillows, Inc. The fiscal year is a calendar year. A. On January 1, 2020, Luna's Feather Pillows, Inc borrowed $100,000 at 6%. The loan is due December 31, 2020. Record, in good form, all the journal entries related to this borrowing. B. On January 1, 2020, Luna borrowed $250,000 at 8% by issuing a note. The note matures on December 31, 2021. Record, in good form, all the journal entries related to this borrowing. C On January 1, 2021, Luna's Feather Pillows, Inc. issued 8% bonds dated January 1, with a face amount of $800,000. The bonds mature on December 31, 2024 (4 years) and pay interest annually. The market yield for bonds of similar risk and maturity was 8% when the bonds were issued. Prepare, in good form, all the journal entries and amortization schedule for the bonds. D. On January 1, 2021, Luna's Feather Pillows, Inc. issued 8% bonds dated January 1, with a face amount of $800,000. The bonds mature on December 31, 2025 (5 years) and pay interest annually. The market yield for bonds of similar risk and maturity was 12% when the bonds were issued. Prepare, in good form, all the journal entries and amortization schedule for the bonds. E. On January 1, 2021, Luna's Feather Pillows, Inc. issued 8% bonds dated January 1, with a face amount of $800,000. The bonds mature on December 31, 2025 (5 years) and pay interest semi- annually. The market yield for bonds of similar risk and maturity was 6% when the bonds were issued. Prepare, in good form, all the journal entries and amortization schedule for the bonds.

effective interest

Answer 1

Solutions:

01-Jan-20	Cash	100000.00
	Loans Payable		100000
	To record the money borrowed @6%
01-Jan-20	Cash	250000
	Notes Payable		250000
	To record issuance of $250,000 8% notes
01-Jan-20	Cash	800000
.	Bonds Payable		800000
	To record issue of 8% bonds at the face value of 800000. As the market rate of interest and the coupon rate are same at 8%, the bond is issued at par .

C. No Amortisation schedule, as the bond is issued at par value

D.

01-Jan-20	Cash	684647.16
	Discount on Bonds Payable	115352.84
	Bonds Payable		800000
	To record the issue of 8% bonds of FV $800,000 at a discount. The bond is issued at a discount as the market rate (12%) is higher than the coupon rate of( 8%)

Present Value of Face		$4,53,941.48
Present Value of Interest Payments		$2,30,705.68
	Total	$6,84,647.16
Face Value of Bond		$8,00,000.00
Initial Amount of Discount/(Premium)		$1,15,352.84

AMORTIZATION SCHEDULE

Period	Interest Expense	Cash Interest	Discount Amortisation	Discount Balance	Bond Carrying Value
0				115352.8	684647.16
1	82157.66	64000	18157.66	97195.18	702804.82
2	84336.58	64000	20336.58	76858.6	723141.40
3	86776.97	64000	22776.97	54081.63	745918.37
4	89510.2	64000	25510.2	28571.43	771428.57
5	92571.43	64000	28571.43	0	800000

E.

01-Jan-20	Cash	867397.82
	Premium on Bonds Payable		67397.82
	Bonds Payable		800000
	To record the issue of 8% bonds of FV $800,000 at a premium. The bond is issued at a premium as the market rate (6%) is lower than the coupon rate of( 8%)

Present Value of Face		$5,97,806.54
Present Value of Interest Payments		$2,69,591.28
	Total	$8,67,397.82
Face Value of Bond		$8,00,000.00
Initial Amount of Discount/(Premium)		($67,397.82)

AMORTIZATION SCHEDULE

Period	Interest Expense	Cash Interest	Premium Amortisation	Discount Balance	Bond Carrying Value
0				67397.82	867397.82
1	52043.87	64000	11956.13	55441.69	855441.69
2	51326.5	64000	12673.5	42768.19	842768.19
3	50566.09	64000	13433.91	29334.28	829334.28
4	49760.06	64000	14239.94	15094.34	815094.34
5	48905.66	64000	15094.34	0.00	800000.00