Question

When Patey Pontoons issued 6% bonds on January 1, 2021, with a face amount of $600,000, the market yield for bonds of similar risk and maturity was 10%. 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.

Answer 1

1. Given: (4 years x 2) = 8 (10% + 2) = 5% n: i: Price of bonds = Principal Amount x PVF(5%, 8 yrs) + Interest (Annuity) x PVAF(5%, 8 yrs) = ($600,000 x 0.676839) + [(S600,000 x 6% x 6/12)] × 6.463213 = $406103 + $116337 = $522,440 2. Credit Date General Journal Debit Jan 01, 2021Cash $522,440 Discount on bond payable Bond payable $77,560 $600,000

3.

Semi-annual interest period-End	Cash interest	Bond interest expense	Discount amortization	Unamortized discount	Carrying value
01/01/2021				$77,560	$522,440
06/30/2021	$18,000	$26,122	$8,122	$69,438	$530,562
12/31/2021	$18,000	26528	$8,528	$60,910	$539,090
06/30/2022	$18,000	26955	$8,955	$51,955	$548,045
12/21/2022	$18,000	27402	$9,402	$42,553	$557,447
06/30/2023	$18,000	27872	$9,872	$32,681	$567,319
12/31/2023	$18,000	28366	$10,366	$22,315	$577,685
06/30/2024	$18,000	28884	$10,884	$11,431	$588,569
12/31/2024	$18,000	29428	$11,431	$0	$600,000

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4.

Journal entries as follows:

Date	General Journal	Debit	Credit
Jun. 30, 2021	Interest expense	$26,122
	Discount on bond payable		$8,122
	Cash		$18,000

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5.

Bond reported on December 31, 2021 = $539090

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6.

Interest expense reported ($26122+$26528) = $52,650

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7.

Journal entries as follows:

Date	General Journal	Debit	Credit
Dec. 31, 2024	Interest expense	$29,429
	Discount on bond payable		$11,429
	Cash		$18,000
Dec. 31, 2024	Bond payable	$600,000
	Cash		$600,000