Question

22. Mozart Inc. issued 5% bonds with a face amount of $500,000 on November 1, 2018. The bonds sold for a price to yield the market rate of 6%. The bonds mature October 31, 2038 (20 years). Interest is paid semiannually on April 30 and October 31. The fiscal year ends December 31 for Mozart. Show your calculations.

Required:

1) Determine the price of the bonds issued on November 1, 2018, Show your computations.

2) Prepare the journal entry to record the issuance of the bonds on November 1, 2018,

3) Prepare the journal entries on

December 31, 2018 (adjusting entry)

April 30, 2019 (1st payment)

October 31, 2019 (2nd payment)

4) Assume all bonds are retired at 102 on November 1, 2019 right after the second payment. Prepare the journal entry for the retirement.

Answer 1

Working notes: Based on PV table Amount PV factor at 3% 0.30656 23.11477 $500,000 $12,500 Face value-Bond Cash interest Issue price of Bond Face value of Bond Discount on issue of bond PV of Cash flows $153,278 $288,935 $442,213 $500,000 $57,787 Cash interest is on face value of bond = $500,000*5%/2 = $12,500 1 Issue price of the bond $442,213 2 Credit Date Account Titles and Explanation November 1, 2018 Cash Discount on bonds payable Bond payable (To record issue of bonds) Debit $442,213 $57,787 $500,000 3) Adjusting entry Date Dec 31, 2018 Debit $4,422 Account Titles and Explanation Interest expense Discount on bonds payable Interest payable (To record interest accrued) Credit $13,266/6* 2 months $255 $766/6*2 months $4,167 $12,500/6* 2 months Credit 1st payment Date Account Titles and Explanation April 30, 2019 Interest expense Interest payable Discount on bonds payable Cash (To record interest paid) Debit $8,844 $4,167 $13,266/6* 4 months $511 $766/6*4 months $12,500 Credit Debit $13,289 2nd payment Date Account Titles and Explanation October 31, 2019 Interest expense Discount on bonds payable Cash (To record interest paid) $789 $12,500 4) Credit Debit $500,000 $66,231 Date Account Titles and Explanation November 1, 2019 Bond payable Loss on redemption of bond Discount on bonds payable Cash (To record redemption of bonds) $56,231 $510,000 Working notes: Carrying value of bond, November 1, 2019 $443,7691 Face value of bond redeemed Redemption value of bond $500,000 $510,000 102% of face value $66,231 Loss on redemption of bond (Redemption value-Carrying vale of bond) Amortization table Effective-Interest Method Period Discount Interest Amortization expense Date Cash Interest Paid Unamortized Discount Carrying value Nov 1, 2018 April 30, 2019 October 31, 2019 $12,500 $12,500 $13,266 $13,289 $766 $789 $57,787 $57,021 $56,231 $442,213 $442,979 $443,769