Question

Mitchell Inc. issued 40, 6%, $1,000 bonds on January 1, 2020. The bonds pay cash interest semiannually each July 1, and December 31, and were issued to yield 7%. Debt issuance costs were $800. The bonds mature December 31, 2022, and the company uses the effective interest method to amortize bond discounts and debt issuance costs.Required a. Determine the selling price of the bonds. Round amount to the nearest whole dollar. b. Prepare an amortization schedule for the full bond term. c. Prepare journal entries on the following dates. 1. January 1, 2020, bond issuance. 2. June 30, 2020, interest payment. 3. December 31, 2020, interest payment.

Answer 1

Answer:

a. Determine the selling price of the bonds.

we can use the approximate yield to maturity formula to determine the price of the bonds:

0.035 = {30 + [(1,000 - MV) / 5]} / [(1,000 + MV) / 2]

0.035 x [(1,000 + MV) / 2] = 30 + [(1,000 - MV) / 5]

0.035 x (500 + 0.5MV) = 30 + 200 - 0.2MV

17.5 + 0.0175MV = 230 - 0.2MV

0.2175MV = 212.5

MV = 212.5 / 0.2175 = $977

b. Prepare an amortization schedule for the full bond term.

I used an excel spreadsheet because there is not enough room here

c. Prepare journal entries on the following dates.

1. January 1, 2020, bond issuance.

Dr Cash 38,280

Dr Credit issuance cost 800

Dr Discount on bonds payable 920

    Cr Bonds payable 40,000

2. June 30, 2020, interest payment.

Dr Interest expense 1,368

Dr Debt issue expense 146

    Cr Cash 1,200

    Cr Discount on bonds payable 168

    Cr Credit issuance cost 146

[($40,000 - $920) x 3.5%] - $1,200 = $168

($168 / $920) x $800 = $146

3. December 31, 2020, interest payment.

Dr Interest expense 1,374

Dr Debt issue expense 151

    Cr Cash 1,200

    Cr Discount on bonds payable 174

    Cr Credit issuance cost 151

[($40,000 - $752) x 3.5%] - $1,200 = $174

($174 / $920) x $800 = $151