Homework Answers
| Part -(a) | Purchase price of the Bonds | ||||
| Year | Cash flows | Present value @ 9% (18%/2) | Present value | ||
| 1 | 504,000 | 0.9174312 | 462,385 | ||
| 2 | 504,000 | 0.8416800 | 424,207 | ||
| 3 | 504,000 | 0.7721835 | 389,180 | ||
| 4 | 504,000 | 0.7084252 | 357,046 | ||
| 5 | 504,000 | 0.6499314 | 327,565 | ||
| 6 | 504,000 | 0.5962673 | 300,519 | ||
| 7 | 504,000 | 0.5470342 | 275,705 | ||
| 8 | 504,000 | 0.5018663 | 252,941 | ||
| 9 | 504,000 | 0.4604278 | 232,056 | ||
| 10 | 504,000 | 0.4224108 | 212,895 | ||
| 10 | 7,200,000 | 0.4224108 | 3,041,358 | ||
| Purchase price of the Bonds | 6,275,857 | ||||
| Premium on Bonds = (7,200,000-6,275,857) = 924,143 | |||||
| Part - (b) | Journal entry on acquisition of Bonds | ||||
| 1/1 | Investment in Bonds | 7,200,000 | |||
| Cash | 6,275,857 | ||||
| Premium on Investment in Bonds | 924,143 | ||||
| (Bond acquired) | |||||
| Part - (c) | Amortization table | ||||
| Date | Cash | Income | Amortization | Carrying amount | |
| (7,200,000*7%) | (Carrying amount * 9%) | (Expense-Cash) | |||
| 1/1 | 6,275,857 | ||||
| 6/30 | 504,000 | 564,827.16 | 60,827 | 6,336,684 | |
| 12/31 | 504,000 | 570,301.60 | 66,302 | 6,402,986 | |
| 6/30 | 504,000 | 576,268.74 | 72,269 | 6,475,255 | |
| 12/31 | 504,000 | 582,772.93 | 78,773 | 6,554,028 | |
| 6/30 | 504,000 | 589,862.50 | 85,862 | 6,639,890 | |
| 12/31 | 504,000 | 597,590.12 | 93,590 | 6,733,480 | |
| 6/30 | 504,000 | 606,013.23 | 102,013 | 6,835,494 | |
| 12/31 | 504,000 | 615,194.42 | 111,194 | 6,946,688 | |
| 6/30 | 504,000 | 625,201.92 | 121,202 | 7,067,890 | |
| 12/31 | 504,000 | 636,110.09 | 132,110 | 7,200,000 | |
| Part - (d) | Journal entry of interest income for 1st year | ||||
| 6/30 | Cash | 504,000 | |||
| Premium on Bonds payable | 60,827 | ||||
| Interest received | 564,827 | ||||
| (Interest received and premium amortized) | |||||
| 12/31 | Cash | 504,000 | |||
| Premium on Bonds payable | 66,302 | ||||
| Interest received | 570,302 | ||||
| (Interest received and premium amortized) | |||||
| Part - (e) | Cash | 6,620,000 | |||
| Loss on Investment in Bonds | 113,480 | ||||
| Investment in Bonds | 6,733,480 | ||||
| (Bond sold) | |||||
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