Question

On June 1, 2016, Everly Bottle Company sold $2,000,000 in long-term bonds for $1,754,211. The bonds will mature in 10 years and have a stated interest rate of 8% and a yield rate of 10%. The bonds pay interest annually on May 31 of each year. The bonds are to be accounted for under the effective-interest method. Instructions (a) Construct a bond amortization table for this problem to indicate the amount of interest expense and discount amortization at each May 31. Include only the first four years. Make sure all columns and rows are properly labeled. (Round to the nearest dollar.) (b) The sales price of $1,754,211 was determined from present value tables. Specifically explain how one would determine the price using present value tables. (c) Assuming that interest and discount amortization are recorded each May 31, prepare the adjusting entry to be made on December 31, 2018. (Round to the nearest dollar.)

please provide work

Answer 1

(a)	Date	Beginning book value	Interest paid	Interest expense	Discount amortized	Ending book value
		a	b	c=a*10%	d=c-b	f=a+d
	June 1,2016					1754211
	May 31,2017	1754211	160000	175421	15421	1769632
	May 31,2018	1769632	160000	176963	16963	1786595
	May 31,2019	1786595	160000	178660	18660	1805255
	May 31,2020	1805255	160000	180525	20525	1825780
	Interest paid=Bond face value*Stated interest rate=2000000*8%=$ 160000
(b)	Issue price of the bond=Present value of interest payment+Present value of face value at repayment
	Interest expense=Face value*stated rate=2000000*8%=$ 160000
	Number of periods=10 years
	Discount rate=Yield rate=10%
	Present value of interest payment=Present value of $ 160000 at 10% for 10 years=160000*6.14457=$ 983131
	Present value of face value at repayment=Present value of $2000000 at 10% for 10th year=2000000*0.38554=$ 771080
	Issue price of the bond=983131+771080=$ 1754211
c)	Adjusting entry:
	Date	Account titles and explanation					Debit	Credit
	Dec 31,2018	Interest expense			(178660*7/12)		104218
		Interest payable						104218
		(Interest accrued from June 1 to Dec 31-7 months)
		(Refer amortization table-May 31,2019 row)