Question

Ari Goldstein issued $700,000 of 15% 12 year bonds payable on january 1, 2016. The market interest rate at the date of issuance was 14% and the bonds pay interest semianually. Requirments

1. How much cash did the company receive upon issuance of bonds payable?

2. Prepare an amortization table for the bond using effective interest method, through the first two interest payments (round all numbers to the nearest whole dollar)

3. Journalize the issuance of the bonds on January 1 ,2016 and payments of the first semi annual interest amount and amortization of the bond on June 30, 2016 explanations are not required

Answer 1

Answer:

Part 1)

Cash received on issue=Present value of face value of bond+present value of coupon payments

=PVF(700000, n=12*2, r=14/2%)+PVAF(52500, n=12*2, r=14/2%)

Present Value (P)=C/{[(1+r)^n]}

Where,

C=Future Value= 700000

r=ROI= 0.07

n=No. of periods= 24

Now putting values in formula,

= 700000/{[(1+ 0.07)^24 ]}

= 700000/{[( 1.07)^24 ]}

= 700000/{[ 5.07237 ]}

= 138002.634

Present Value (P)=C/{[(1+r)^n]}

Where,

C=Future Value= 52500

r=ROI= 0.07

n=No. of periods= 24

Now putting values in formula,

= 52500/{[(1+ 0.07)^24 ]}

= 52500/{[( 1.07)^24 ]}

= 52500/{[ 0.19715 ]}

= 0.8029

= 52500{ 11.46933}

= 602140.03504

Now cash received=138,002.63+602,140.04=$740,142.67

Part 2)

E G A B с D F INTEREST INT EXPENSEL PAYMENT PREVIOUS (FACE BOOK AMORTIS BALANCE IN BOOK VAL 15/2 VAL IN ATION(B- PREMIUM(PR FACE VALUE(PRE DATE %) G*14/2%) C) EV VALUE-D) VALUE V VALUE-D) Coupon Payment 40143 700000 740143 52500 51810 690 39453 700000 739453 2 52500 51762 738 38714 700000 738714 1 2

Part 3)

Date Account Titles and Explanation Jan 1, 16 Cash To Premium on issue of bonds To Bonds Payable Debit($) Credit($) 740,143 40,143 700,000 Jun 30, 16 Interest Expense Premium on bonds payable To Interest on bonds payable 51,8101 690 52,500 52,500 Jun 30, 16 Interest on bonds payable To Cash 52,500

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