Thursday 24 May 2012

When Patey Pontoons issued 7.00% bonds on January 1, 2011, with a face amount of $490,000, the market yield for bonds of similar risk and maturity was 8.00%. The bonds mature December 31, 2014 (4 years). Interest is paid semiannually on June 30 and December 31. (Use Table 2 and Table 4) Required:


When Patey Pontoons issued 7.00% bonds on January 1, 2011, with a face amount of $490,000, the
market yield for bonds of similar risk and maturity was 8.00%. The bonds mature December 31, 2014 (4
years). Interest is paid semiannually on June 30 and December 31. (Use Table 2 and Table 4)
Required:
(1) Determine the price of the bonds at January 1, 2011. (Do not round PV factors. Round final answer
to the nearest dollar amount. Omit the "$" sign in your response.)
Price of the bonds $ 473,505
(2) Prepare the journal entry to record their issuance by Patey on January 1, 2011. (Do not round PV
factors. Round final answer to the nearest dollar amount. Omit the "$" sign in your response.)
Date General Journal Debit Credit
Jan. 1 Cash 473,505
Discount on bonds 16,495
Bonds payable 490,000
(3) Prepare an amortization schedule that determines interest at the effective rate each period. (Do not
round PV factors. Round final answer to the nearest dollar amount. Omit the "$" sign in your
response.)
Cash Effective Increase in Outstanding
Payment Interest Balance Balance
473,505
1 17,150 18,940 1,790 475,295
2 17,150 19,012 1,862 477,157
3 17,150 19,086 1,936 479,093
4 17,150 19,164 2,014 481,107
5 17,150 19,244 2,094 483,201
6 17,150 19,328 2,178 485,379
7 17,150 19,415 2,265 487,644
8 17,150 19,506 2,356 490,000
137,200 153,695 16,495
(4) Prepare the journal entry to record interest on June 30, 2011. (Do not round PV factors. Round final
answer to the nearest dollar amount. Omit the "$" sign in your response.)
Date General Journal Debit Credit
June 30 Interest expense 18,940
Discount on bonds payable 1,790
Cash 17,150
(5) What is the amount related to the bonds that Patey will report in its balance sheet at December 31,
2011? (Do not round PV factors. Round final answer to the nearest dollar amount. Omit the "$"
sign in your response.)
December 31, 2011 net liability $ 477,157
(6) What is the amount related to the bonds that Patey will report in its income statement for the year
ended December 31, 2011? (Ignore income taxes.) (Do not round PV factors. Round final answer to
the nearest dollar amount. Omit the "$" sign in your response.)
Interest expense for 2011 $ 37,952
(7) Prepare the appropriate journal entries at maturity on December 31, 2014. (Do not round PV factors.
Round final answer to the nearest dollar amount. Omit the "$" sign in your response.)
Date General Journal Debit Credit
Dec. 31 Interest expense 19,506
Discount on bonds payable 2,356
Cash 17,150
Dec. 31 Bonds payable 490,000
Cash 490,000
rev: 12_13_2011
Explanation:
(1)
Price of the bonds at January 1, 2011
Interest $17,150¥× 6.73274* = $ 115,467
Principal $490,000× 0.73069** = 358,038
Present value (price) of the bonds $ 473,505
¥ 3.500% × $490,000
*present value of an ordinary annuity of $1: n = 8, i = 4.000% (Table 4)
**present value of $1: n = 8, i = 4.000% (Table 2)
(3)
Cash
Payment
Effective
Interest
Increase in
Balance
Outstanding
Balance
3.500% × Face
Amount 4.000% × Outstanding Balance Discount
Reduction
473,505
1 17,150 0.040 (473,505) = 18,940 1,790 475,295
2 17,150 0.040 (475,295) = 19,012 1,862 477,157
3 17,150 0.040 (477,157) = 19,086 1,936 479,093
4 17,150 0.040 (479,093) = 19,164 2,014 481,107
5 17,150 0.040 (481,107) = 19,244 2,094 483,201
17,150 0.040 (483,201) = 19,328 2,178 485,379
7 17,150 0.040 (485,379) = 19,415 2,265 487,644
8 17,150 0.040 (487,644) = 19,506* 2,356 490,000
137,200 153,695 16,495
*rounded
(4)
Interest expense (4.000% × $473,505) = 18,940
Cash (3.500% × $490,000) = 17,150
(5)
Bonds payable $ 490,000
Less: discount (16,495)
Initial balance, January 1, 2011 $ 473,505
June 30, 2011 discount amortization 1,790
Dec. 31, 2011 discount amortization 1,862
December 31, 2011 net liability $ 477,157
(6)
June 30, 2011 interest expense $ 18,940
Dec. 31, 2011 interest expense 19,012
Interest expense for 2011 $ 37,952
(7)
Interest expense (4.000% × 487,644) = 19,506*
* rounded value from amortization schedule
Cash (3.500% × $490,000) = 17,150
National

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