# Answered Essay: When Patey Pontoons issued 8% bonds on January 1, 2016, with a face amount of \$700,000, the market

When Patey Pontoons issued 8% bonds on January 1, 2016, with a face amount of \$700,000, the market yield for bonds of similar risk and maturity was 9%. The bonds mature December 31, 2019 (4 years) Interest is paid semiannually on June 30 and December 31. (FV of \$1, PV of \$1, FVA of \$1. PVA of \$1 FVAD of \$1 and PVAD of \$1) (Use appropriate factor(s) from the tables provided.) Required: 1. Determine the price of the bonds at January 1, 2016. Table values are based on: n= Cash Flow Amount Present Value Interest Price of bonds 2. Prepare the journal entry to record their issuance by Patey on January 1, 2016. (If no entry is required for a transaction/event, select”No journal entry required” in the first account field.) View transaction list View journal entry worksheet ( う No Date General Journal Debit Credit

Formula sheet

 A B C D E F G H I J 2 3 Par value (F) 700000 4 Interest rate (Coupon rate) 0.08 5 Effective interest rate 0.09 6 Time to maturity 4 Years 7 8 9 Semiannual-Annual coupon (C) =D3*D4/2 10 Semiannual Annual Period (n) =D6*2 11 YTM (i) =D5/2 12 Current Value of the bond can be calculated by finding the present value of cash flows of bonds. 13 Cash Flow of Bonds can be written as follows: 14 Period 0 1 2 3 4 … =D10 15 Cash Flow of Bonds =\$D9 =\$D9 =\$D9 =\$D9 =\$D9 =\$D9+D3 16 17 Current Value of Bond =C*(P/A,i,n)+F*(P/F,i,n) 18 Where, C is coupon, F is par value of bond, i is market rate and n is total number of periods. 19 20 Current Value of Bond =C*(P/A,i,n)+F*(P/F,i,n) 21 =D9*PV(D11,D10,-1,0)+D3*(1/((1+D11)^D10)) =D9*PV(D11,D10,-1,0)+D3*(1/((1+D11)^D10)) 22 23 Hence 24 n= =D10 25 i= =D11 26 Cash Flow Amount Present Value 27 Interest =D9 =D27*PV(D25,D24,-1,0) 28 Priciple =D3 =D28*(1/((1+D25)^D24)) 29 Price of Bonds =E27+E28 30 31 2) 32 Face Value of the bond =D3 33 Price of bond =E29 34 Discount on bond =Face Value of bond – Price of bond 35 =D32-D33 36 37 Date Debit Credit 38 Jan-1 2016 Cash =D33 39 Discount of Bonds Payable =F40-E38 40 Bonds Payable =D32 41 42 3) 43 44 Effective Interest Method of Amortization: 45 In this case amortization is calculated based on the effective interest 46 47 Effective Interest rate =D11 48 49 Amortization Table (Effective Interest Method) 50 Year Interest Expense (4.5% of the Carrying Value) Cash Paid(@4% of face value) Amortization (Disc.) Premium Bond Carrying Value 51 42370 =-D35 =E38 52 42551 =H51*\$D\$47 =\$D\$9 =E52-D52 =G51-F52 =H51-F52 53 42735 =H52*\$D\$47 =\$D\$9 =E53-D53 =G52-F53 =H52-F53 54 42916 =H53*\$D\$47 =\$D\$9 =E54-D54 =G53-F54 =H53-F54 55 43100 =H54*\$D\$47 =\$D\$9 =E55-D55 =G54-F55 =H54-F55 56 43281 =H55*\$D\$47 =\$D\$9 =E56-D56 =G55-F56 =H55-F56 57 43465 =H56*\$D\$47 =\$D\$9 =E57-D57 =G56-F57 =H56-F57 58 43646 =H57*\$D\$47 =\$D\$9 =E58-D58 =G57-F58 =H57-F58 59 43830 =H58*\$D\$47 =\$D\$9 =E59-D59 =G58-F59 =H58-F59 60 61 62 4) 63 Journal entry for first interest payment is as follows: 64 Dec-31 2017 Interest Expense =D52 65 Interest Payable =E55 66 Discount on Bonds Payable =-F52
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