Question

When Patey Pontoons issued 10% bonds on January 1, 2021, with a face amount of $800,000, the market yield for bonds of similar risk and maturity was 11%. 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. 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. Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req3 Req 4 Req 5 and 6 Req 7 Determine the price of the bonds at January 1, 2021. (Round final answers to the nearest whole dollar.) % Table values are based on: n = 8 5.5 Cash Flow Amount Interest Principal Price of bonds Present Value

Answer 1

Solutions:

EF Solution 1: Chart Values are based on: 0.947867299 n=(4 Years*2) 8 Half years 0.898452416 i=(11%/2) 5.50% Semi annual 0.851613664 Cash Flow Table Value * Amount = Present Value 0.807216743 Principal 0.651599 $800,000 = 1 $521,279 0.765134354 Interest (Annuity) ($800,000*10%*6/12 6 .334566 $40,000/= $253,383 0.725245833 Price of Bonds $774,662 0.687436809 0.651598871 6.334565988 Solution 2: Patey Pontoons Journal Entries Particulars Date Debit Credit $774,662 $25,338 01-Jan-21 Cash A/c Dr Discount on Bond Payable To bonds payable (Being bond issued at Discount) $800,000 Solution 3: Bond Amortization Schedule Interest Discount Date Cash interest Unamortized discount Expense amortization 01-Jan-21 $25,338 30-Jun-21 $40,000 $42,606 $2,606 $22,732 31-Dec-21 $40,000 $42,750 $2,750 $19,982 30-Jun-22 $40,000 $42,901 $2,901 $17,081 31-Dec-22 $40,000 $43,061 $3,061 $14,021 30-Jun-23 $40,000 $43,229 $3,229 $10,792 31-Dec-23 $40,000 $43,406 $3,406 $7,385 30-Jun-24 $40,000 $43,594 $3,594 $3,791 31-Dec-24 $40,000 $43,791 $3,791 $0 Carrying value $774,662 $777,268 $780,018 $782,919 $785,979) $789,208 $792,615 $796,209 $800,000 Credit Solution 4: Journal Entries Date Particulars 30-Jun-21 Interest Expense Dr To Discount on bond payable To Cash (To record Interest on June 30, 2021) Debit $42,606 $2,606 $40,000 33 34 Et57 (4) Sheet57 (3) Sheet58 ) Sheet59 Sheet6 (6) Sheet60 Sheet61 Sheet63

34 Solution 5: Bonds reported on December 31, 2021 = 780018 36 37 39 Solution 6: Interest expense to be reported in Income statement = 85356 41 Solution 7: 43 Credit Journal Entries Date Particulars 31-Dec-24 interest Expense Dr To Discount on bond payable To Cash Debit $43,791 $3,791 $40,000 $800,000 31-Dec-24 Bond Payable Dr To Cash $800,000 64 Et57 (4) Sheet57 (3) Sheet58 ) Sheet59 Sheet6 (6) Sheet60 Sheet61 Sheet63