Question

Determining the present value of bonds payable and journalizing using the effective interest amortization method Relaxation, Inc. is authorized to issue 7%, 10-year bonds payable. On January 1, 2018, when the market interest rate is 12%, the company issues $300,000 of the bonds. The bonds pay interest semiannually. Requirements 1. How much cash did the company receive upon issuance of the bonds payable? (Round to the nearest dollar.) 2. Prepare an amortization table for the bond using the effective-interest method, through the first two interest payments. (Round to the nearest dollar.) 3. Journalize the issuance of the bonds on January 1, 2018, and the first and second payments of the semiannual interest amount and amortization of the bonds on June 30, 2018, and December 31, 2018. Explanations are not required

Answer 1

Bond Characteristics	Amount
Face Amount	$300,000
Interest Payment($300,000*3.5%)	$10,500
Market Interest rate(12%*6*12)	6.00%
Period to maturity(10 years*2)	30
Issue price	$300,000
Issue Price of Bond =$10,500*PVAF(6%,20) + $300,000*PVIF(6%,20) =$10,500*11.46992 + $300,000*0.31180
Issue Price of Bond =$120,434.16 + $93,540 =$213,974
So the Bond is issued at a discount of $86,026($300,000-$213,974) which will be amortized over 20 payment period
Period	Bonds Payable, Net(Op.Bal)	Interest Expense(@6% on Closing value of Bonds payable)	Cash Paid(@3.5% on Face value of $300,000)	Amortization amount	Unamortized amount	Bonds Payable, Net(Cl.Bal)
01-Jan-18	-	-	-	-	86,026	2,13,974
30-Jun-18	2,13,974	12,838	10,500	2,338	83,688	2,16,312
31-Dec-18	2,16,312	12,979	10,500	2,479	81,209	2,18,791
	Date	Accounts and explanation	Debit(in $)	Credit(in $)
	01-Jan-18	Cash	2,13,974
		Discount on Bonds Payable	86,026
		Bonds Payable		3,00,000
		(To bonds issued at discount)
	30-Jun-18	Interest Expenses	12,838
		Discounts on Bond payable		2,338
		Cash		10,500
		(Discount on Bonds amortized)
	31-Dec-18	Interest Expenses	12,979
		Discounts on Bond payable		2,479
		Cash		10,500
		(Discount on Bonds amortized)