Question

Please complete all the required parts.

Part 1: CO / do Davis Company issued 10% annual rate, face value S600,000 bonds dated January 1, 20X3 on May 1, 20X3 to yield 8% annual market interest rate. The bonds pay interest every June 30 and December 31 and mature December 31 20X7. Assume the effective interest method. Required: A. Calculate the issue price of the bonds and set up an amortization schedule. B. Prepare the journal entries for the issuance and the first and second interest payments. C. Assume that after the second interest payment Davis bought back 40% of its bonds in the open market and retired them at a price of 98% of face value. What would be the journal entry for the buy back? Part 2: Assume the same information as in Part 1, except the bonds were issued on January 1, 20X3 and annual market interest rate is 12% . The bonds pay interest every June 30 and December 31 and mature December 31, 20X7. Assume the effective interest method. Required: alculate the issue price of the bonds and set up an amortization schedule. Prepare the journal entries for the issuance and the first, second, and third interest payments. Assume that after the third interest payment Davis bought back the bonds in the open market and retired them at a price of 102% of face value. What would be thejournal entry for the buy back? B. C.

Answer 1

As per policy, only one question is allowed to answer at a time, so answering Part 1 & its three parts here:

Part 1:
	For half yearly interest, Period double & interest rate half
A) The issue of bond = half year coupon * PVIFA(Mrate,n) + Par value * PVIF(Mrate,n)
The issue of bond = (600000*10%*1/2) * PVIFA(4%,10) + 600000 * PVIF(4%,10)
The issue of bond =30000 * 8.111 + 600000 * 0.676 = $648930
AMORTIZATION SCHEDULE:
	Interest paid	Interest exp.	Amortised amount	Carrying Amount$
Jan 1,3				648930
Jun 30,3	30000	648930*4%=25957	4043	644887
Dec 31,3	30000	644887*4%=25795	4205	640683
Jun 30,4	30000	25627	4373	636310
Dec 31,4	30000	25452	4548	631762
Jun 30,5	30000	25270	4730	627033
Dec 31,5	30000	25081	4919	622114
Jun 30,6	30000	24885	5115	616999
Dec 31,6	30000	24680	5320	611679
Jun 30,7	30000	24467	5533	606146
Dec 31,7	30000	24246	5754	600392
B) Journal Entries:
Date	Accounts Titles	Debit $	Credit $
Jan 1,3	Cash	648930
	Bond Payable		600000
	Premium on Bond issue		48930
	(being bond issue on premium)
Jun 30,3	Interest expense	25957
	Premium on Bond issue	4043
	Cash		30000
	(being interest paid and premium adjusted)
Dec 31,3	Interest expense	25795
	Premium on Bond issue	4205
	Cash		30000
	(being interest paid and premium adjusted)
C) Journal Entry of Buy Back of 40% of Bonds:
AMORTIZATION SCHEDULE:
	Interest paid	Interest exp.	Amortised amount	Carrying Amount$
Jan 1,3				259572
Jun 30,3	12000	10383	1617	257955
Dec 31,3	12000	10318	1682	256273
Journal Entry
Jan 1,4	Bond Payable	240000
	Premium on Bond issue	16273		(256273-240000)
	Cash		235200	(240000*98%)
	Profit on redeemption of bonds		21073
	(being 40% of bonds redeemed @ 98% and
	premium adjusted )