Business High School

When Patey Pontoons issued 10% bonds on January 1, 2021, with a face amount of $720,000, the market yield for bonds of similar risk and maturity was 11%. The bonds mature December 31, 2024 (4 years). Interest is paid semiannually on June 30 and December 31.



Required:


a. Determine the price of the bonds at January 1, 2021.


b. Prepare the journal entry to record their issuance by Patey on January 1, 2021.

Answers

Answer 1

A. Therefore, the price of the bonds at January 1, 2021, is approximately $612,084.95.

B.The discount on bonds payable is calculated as the difference between the face value of the bonds and the price paid for them ($720,000 - $536,624.84 = $183,375.16).

The premium on bonds payable arises because the market yield is higher than the coupon rate, causing the bonds to be issued at a price lower than the face amount.

a. To determine the price of the bonds at January 1, 2021, we need to calculate the present value of the bond's future cash flows using the market yield rate of 11%.

Step 1: Calculate the periodic interest payment:

Interest payment = Face amount of the bond × Coupon rate

Interest payment = $720,000 × 10% = $72,000 (per year)

Interest payment per semiannual period = $72,000 / 2 = $36,000

Step 2: Calculate the present value of the bond's future cash flows:

PV = (Interest payment / (1 + Market yield rate/2)^n) + (Face amount / (1 + Market yield rate/2)^n)

PV = ($36,000 / (1 + 0.11/2)^8) + ($720,000 / (1 + 0.11/2)^8)

PV = $36,000 / (1.055)^8 + $720,000 / (1.055)^8

PV = $27,439.81 + $584,645.14

PV = $612,084.95

b. The journal entry to record the issuance of the bonds on January 1, 2021, would be:

Cash                   $536,624.84

Discount on bonds payable    $183,375.16

Bonds payable             $720,000

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