Q37PGA_1 - Horngren'S Financial And Managerial Accounting

Question

Determining the present value of bonds payable and journalizing

using the effective-interest amortization method

Brad Nelson, Inc. issued $600,000 of 7%, six-year bonds payable on January 1, 2018.

The market interest rate at the date of issuance was 6%, and the bonds pay interest

semiannually.

Requirements

1. How much cash did the company receive upon issuance of the bonds payable? (Round to the nearest dollar.)

2. Prepare an amortization table for the bond using the effective-interest method, through the first two interest payments (Round to the nearest dollar.)

3. Journalize the issuance of the bonds on January 1, 2018, and the first and second payments of the semiannual interest amount and amortization of the bonds on June 30, 2018, and December 31, 2018. Explanations are not required.

Step-by-Step Solution

Answer

The company receives $611,862 upon the issuance of bonds

Step 1: Definition of present value

The present value means the value of bonds from a specific date in the future.

Step 2: The amount received on the issue is

$\begin{array}{c}\mathrm{Present}\mathrm{value}\mathrm{of}\mathrm{principal}=\mathrm{Issue}\mathrm{price}\times \mathrm{PVIF}(3\mathrm{\%},12)\\ =\mathrm{\$}600,000\times 0.70138\\ =\mathrm{\$}420,828\end{array}$

$\begin{array}{c}\mathrm{Present}\mathrm{Value}\mathrm{of}\mathrm{Interest}=\mathrm{Interest}\mathrm{amount}\times \mathrm{PVAF}(3\mathrm{\%},12)\\ =\mathrm{\$}21,000\times 9.95400\\ =\mathrm{\$}209,034\end{array}$

$\begin{array}{c}\mathrm{Amount}\mathrm{receive}\mathrm{on}\mathrm{issue}=\mathrm{Present}\mathrm{Value}\mathrm{of}\mathrm{Principal}\times \mathrm{Present}\mathrm{Value}\mathrm{of}\mathrm{Interest}\\ =\mathrm{\$}400,828\times \mathrm{\$}209,034\\ =\mathrm{\$}611,862\end{array}$

Hence, the amount received on the issue is $611,862