Question

Exercise 14-9 (Algo) Issuance of bonds; effective interest; amortization schedule; financial statement effects [LO14-2]

When Patey Pontoons issued 4% bonds on January 1, 2021, with a face amount of $520,000, the market yield for bonds of similar risk and maturity was 5%. The bonds mature December 31, 2024 (4 years). Interest is paid semiannually on June 30 and December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
1. Determine the price of the bonds at January 1, 2021.

2. Prepare the journal entry to record their issuance by Patey on January 1, 2021.

Table values are based on: i= Present Value Cash Flow Amount Interest Principal Price of bonds

3. Prepare an amortization schedule that determines interest at the effective rate each period.

4. Prepare the journal entry to record interest on June 30, 2021.

5. What is the amount related to the bonds that Patey will report in its balance sheet at December 31, 2021?
6. What is the amount related to the bonds that Patey will report in its income statement for the year ended December 31, 2021? (Ignore income taxes.)

7. Prepare the appropriate journal entries at maturity on December 31, 2024.

Answer 1

Dear Student ,

Please see below answer line by line and carefully see each stage of Bond Investment , discount , Present value calculation , complete Amortization table with principal amount , interest amount, amortized discount amount with Journal Entry as on 31st Dec   

Answer 1	Patey Pontoons issued 4% on Jan 1,2021
	Face Value $		5,20,000
	Bond Rate		4%	Semi annual Rate	2.0%
	Market Yield		5%	Semi annual Yiled	2.5%
	Bonds mature 31s Dec 2024= 4 years
				Semi annual Period=Years	8

	Interest is paid semiannual == June 30, Dec 31
	Determined the price of the Bond Jan1 2021
	Face Value $	5,20,000
	Semiannual Interest rate	2.0%
	Semiannual Interest amount $	10,400	($520000*2%)
	Proceed from Bond $	10400		Year 1	0.97561	1/(1.025)
	PVA( 2.5% rate for 8 year)	7.170		Year 2	0.95181
	( as calculated below)			Year 3	0.92860
	PV @ 8th year ( as calculated below)	0.8207		Year 4	0.90595
	Face Value $	5,20,000		Year 5	0.88385
	So need to calculated Proceed from Bond			Year 6	0.86230
	$10400*7.170+$520000*0.8207			Year 7	0.84127
	calculated Proceed from Bond$	5,01,332		Year 8	0.82075
	Sum of Discount factor 2.5%			Total	7.170

Answer 2	Journal Entry
	Details	Debit($)	Credit($)
	cash	5,01,332
	Discount Bonds Amortized cost	18,668
	Bonds payable		5,20,000

Answer 3	Amortization table
	Date	cash paid$	Interest Expenses $	Discount Amortized $	Unamortized - discount $	Carrying Value $
	1st Jan21				18,668	5,01,332
	30th Jun21	10,400	12,533	2,133	16,535	5,03,465
	31St Dec21	10,400	12,587	2,187	14,348	5,05,652
	30th Jun22	10,400	12,641	2,241	12,107	5,07,893
	31St Dec22	10,400	12,697	2,297	9,809	5,10,191
	30th Jun23	10,400	12,755	2,355	7,455	5,12,545
	31St Dec23	10,400	12,814	2,414	5,041	5,14,959
	30th Jun24	10,400	12,874	2,474	2,567	5,17,433
	31St Dec24	10,400	12,936	2,536	-	5,20,000

Answer 4	Details	Debit($)	Credit($)
30th Jun21	Interest Expenses	12,533
	cash		10,400
	Discount Bonds Amortized cost		2,133
31St Dec21	Interest Expenses	12,587
	cash		10,400
	Discount Bonds Amortized cost		2,187
Answer 5	The amount relates to Bond that Patey
31St Dec21	will report in the Balance Sheet Dec 31st 2021 $	5,05,652	( as above)
Answer 6	Interest expenses as on 31st Dec $	25,120	( as above)
	$ 12533+ $12587
Answer 7	Maturity time payment
31St Dec24	Details	Debit($)	Credit($)
	Bonds payable	5,20,000
	cash		5,20,000
	Details	Debit($)	Credit($)
	Interest Expenses	12,936
	Discount Bonds Amortized cost		2,536
	cash		10,400