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