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, selectNo journal entry required in the first account field.) View transaction list View journal entry worksheet ( う No Date General Journal Debit Credit

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

Expert Answer

 

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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