Section 2 Assume, instead, that on January 1, 2012, Harrison Company issued $800,000 of 10-year, 7%...
Section 2
Assume, instead, that on January 1, 2012, Harrison Company issued $800,000 of 10-year, 7% face value bonds. The market rate of other similar bonds was 8%. The bonds pay interest semi-annually every January 1 and July 1.
Required: 1. Determine the selling price of the bond using the Time Value of Money tables. You MUST show all work, including writing out the amounts (principal and interest amounts) as well as the two PV factors used to determine the selling price of the bond.
2. Prepare a bond amortization table to show the interest paid, interest expense, amortization of the premium or discount and carrying value of the bond from the issue date until the maturity of the bond. (If you use Word, please show your calculations for each of these amounts for the first five periods. If you use Excel, your Excel cells should show your formulas for each amount.)
3. Assume that, on July 1 2019, Harrison Company retired the bonds at 98. Determine the price paid to retire the bond. What was the gain or loss on the retirement of the bonds?
Homework Answers
| ans 1 | ||||
| n | 20 | |||
| i | 4.00% | |||
| Amt | Factor table | Factor | Amt | |
| Interest payments | 28000 | PV of annuity $1 | 13.59033 | 380529 |
| Principal | $800,000 | PV of $1 | 0.45639 | 365112 |
| Price of the bonds | 745641 | |||
| rounded two zero decimal | ||||
| Interest payments | ||||
| 800000*3.5% | 28000 | |||
| ans 2 | ||||
| Amortization schedule | ||||
| Year | Interest payments I $800000*3.5% | Interest expenses E C*4% | Amortized premium I-E | Carrying value C-last period carrying value |
| Jan 1 2012 | 745641 | |||
| July 1 2012 | 28000 | 29826 | 1826 | 747467 |
| Jan 1 2013 | 28000 | 29899 | 1899 | 749366 |
| July 1 2013 | 28000 | 29975 | 1975 | 751340 |
| Jan 1 2014 | 28000 | 30054 | 2054 | 753394 |
| July 1 2014 | 28000 | 30136 | 2136 | 755530 |
| Jan 1 2015 | 28000 | 30221 | 2221 | 757751 |
| July 1 2015 | 28000 | 30310 | 2310 | 760061 |
| Jan 1 2016 | 28000 | 30402 | 2402 | 762463 |
| July 1 2016 | 28000 | 30499 | 2499 | 764962 |
| Jan 1 2017 | 28000 | 30598 | 2598 | 767560 |
| July 1 2017 | 28000 | 30702 | 2702 | 770263 |
| Jan 1 2018 | 28000 | 30811 | 2811 | 773073 |
| July 1 2018 | 28000 | 30923 | 2923 | 775996 |
| Jan 1 2019 | 28000 | 31040 | 3040 | 779036 |
| July 1 2019 | 28000 | 31161 | 3161 | 782197 |
| Jan 1 2020 | 28000 | 31288 | 3288 | 785485 |
| July 1 2020 | 28000 | 31419 | 3419 | 788905 |
| Jan 1 2021 | 28000 | 31556 | 3556 | 792461 |
| July 1 2021 | 28000 | 31698 | 3698 | 796159 |
| Jan 1 2022 | 28000 | 31846 | 3840 | 800000 |
| ans 3 | ||||
| Jul-19 | Price paid to retire bond=800000/100*98 | 784000 | ||
| Loss on retirement of bonds | $1,802 | |||
| working | ||||
| Journal entry | Dr | CR | ||
| Bonds payable | $800,000 | |||
| Loss on retirement of bonds | $1,802 | |||
| Unamortized discount (800000-782197 the carrying value of bonds on July 1 2019) | 17802 | |||
| Cash | 784000 | |||
| If any doubt please comment | ||||
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