Question

On July 1, 2020 Pronghorn Limited issued bonds with a face value of $980,000 due in 20 years, paying interest at a face rate of 10% on January 1 and July 1 each year. The bonds were issued to yield 11%. The company’s year-end was September 30. The company used the effective interest method of amortization.

Using 1. factor Tables 2. a financial calculator, or 3. Excel function PV, calculate the premium or discount on the bonds. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 5,275.)

Premium/Discount on bond

$

Enter your answer in accordance to the question statement

Prepare a partial Bond Premium/Discount Amortization Schedule for Pronghorn Limited. Only prepare the entries in the schedule for July 1, 2020, January 1, 2021, and July 1, 2021. (Round answers to 0 decimal places, e.g. 5,275.)

Date

Cash Paid

Interest Expense

Amortized

Carrying Amount

1-Jul-20

$

$

$

$

1-Jan-21

1-Jul-21

Prepare the journal entry to record the issue of the bonds. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,275.)

Date	Account Titles and Explanation	Debit	Credit
July 1

Prepare the year-end accrual entry for Pronghorn Limited at September 30, 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,275.)

Date	Account Titles and Explanation	Debit	Credit
Sept. 30

Prepare the journal entry on January 1, 2021 when Pronghorn makes the first payment of interest on the bonds. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,275.)

Date	Account Titles and Explanation	Debit	Credit
Jan. 1, 2021

Answer 1

Bond Price computed using a financial calculator:

Face/par value:* 980000 Coupon rate:* 10 Coupon rate compounding freq.:* Semi-annually Market interest rate: * No. of years until maturity:* 20 Calculate Reset Bond price = $901,373.99 Considering that the bond price is lower than the par value the bond should be selling at a discount.

Bond price = $901373.99 = $901374

Discount on bond = $980000 - $901374 = $78626

Date	Cash Paid	Interest Expense	Amortized	Carrying Amount
1-Jul-20				901374
1-Jan-21	49000	49576	576	901950
1-Jul-21	49000	49607	607	902557

Cash paid = $980000 x 10% x 1/2 = $49000

Interest expense = $901374 x 11% x 1/2 = $49576

Interest expense = $901950 x 11% x 1/2 = $49607

Date	Account Titles and Explanation	Debit	Credit
July 1	Cash	901374
	Discount on bonds payable	78626
	Bonds payable		980000
	(To record the issue of the bonds)
Sept. 30	Interest expense	24788
	Discount on bonds payable ($576 x 3/6)		288
	Interest payable ($49000 x 3/6)		24500
	(To record the year-end accrual)
Jan. 1, 2021	Interest payable ($49000 x 3/6)	24500
	Interest expense	24788
	Discount on bonds payable ($576 x 3/6)		288
	Cash		49000
	(To record the first payment of interest on bonds)