Q44PGB - Horngren'S Financial And Managerial Accounting

Question

Determining the present value of bonds payable and journalizing using the effective-interest amortization method

Ari Goldstein issued $300,000 of 11%, five-year bonds payable on January 1, 2018. The market interest rate at the date of issuance was 10%, 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 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 $311,582 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

$\begin{array}{c}\mathbf{Present}\mathbf{value}\mathbf{of}\mathbf{principal}\mathbf{=}\mathbf{issue}\mathbf{price}\mathbf{\times }\mathbf{PVIF}\mathbf{(}\mathbf{5}\mathbf{\%}\mathbf{,}\mathbf{10}\mathbf{)}\\ \mathbf{=}\mathbf{\$}\mathbf{300}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{0}\mathbf{.}\mathbf{61391}\\ =\$184,173\end{array}$

 

$\begin{array}{c}\mathbf{Present}\mathbf{Value}\mathbf{of}\mathbf{Interest}\mathbf{=}\mathbf{Interest}\mathbf{amount}\mathbf{\times }\mathbf{PVAF}\mathbf{(}\mathbf{5}\mathbf{\%}\mathbf{,}\mathbf{10}\mathbf{)}\\ \mathbf{=}\mathbf{\$}\mathbf{16}\mathbf{,}\mathbf{500}\mathbf{\times }\mathbf{7}\mathbf{.}\mathbf{72173}\\ \mathbf{=}\mathbf{\$}\mathbf{127}\mathbf{,}\mathbf{409}\end{array}$

$\begin{array}{c}\mathbf{Amount}\mathbf{receive}\mathbf{on}\mathbf{issue}\mathbf{=}\mathbf{Present}\mathbf{Value}\mathbf{of}\mathbf{Principal}\mathbf{+}\mathbf{Present}\mathbf{Value}\mathbf{of}\mathbf{Interest}\\ \mathbf{=}\mathbf{\$}\mathbf{184}\mathbf{,}\mathbf{173}\mathbf{+}\mathbf{\$}\mathbf{127}\mathbf{,}\mathbf{409}\\ =\$311,582\end{array}$

Hence, the amount received on the issue is $311,582

Step 3: Premium amortization schedule

Period	Interest Expense	Cash Paid	Amortization amount	Carrying amount
January 1, 2018				$311,582
June 30, 2018	$16,500	$15,579.1	$920.9	$310,661.1
December 31, 2018	$16,500	$15,533.05	$966.95	$309,694.6