Question

Patey Pontoons issued 8% bonds on January 1, 2018, with a face amount of $540,000, the market yield for bonds of similar risk and maturity was 11%. The bonds mature December 31, 2021 (4 years). Interest is paid semiannually on June 30 and December 31.

Required:



(1) Determine the price of the bonds at January 1, 2018.


(2) Prepare the journal entry to record their issuance by Patey on January 1, 2018.


(3) Prepare an amortization schedule that determines interest at the effective rate each period.

Answer 1

1) The bonds are issued in Jan 1 2018 and mature in December 2021 which means that the bond have a 4 years maturity. The coupon rate is 8% and payments are semi annual. The face value of the bond is 540,000 and the ytm is 11%.

We will need to put the following in a financial calculator.

FV= 540,000

I/Y= 5.5 (11 divided by 2 because the payments are semi annual so we will divide the interest by 2 also)

N= 8 (4 into 2 because payments are semi annual therefore 2 payments every year)

PMT= 21,600 ( we find the 8 % of 540,000 and divide it by 2 because payments are semi annual)

We enter all these values and compute the present value which is also the price of the bond

PV=488,690

Price of bond = 488,690

2) The bonds have a face value of 540,000 so we will credit bonds payable by 540,000, we will debit cash by 488,690 because that is the price of the bond and cash we receive for it and we will debit discount by 51,310 (540,000-488,690) because that is how much discount the bond is selling for.

Debit Credit

Cash 488,690

Discount 51,310

Bonds payable 540,000

3) Attaching amortization table

The way we amortize is that we multiply the interest rate or ytm by the book value of the bond, and the difference between the interest payment and coupon payment is added to the book value of the bond and subtracted from the discount. This way each payment the interest is higher because the book value of the bond is increasing as we are amortizing the bond.

Step-by-step explanation: