Question

When Patey Pontoons issued 6% bonds on January 1, 2021, with a face amount of $600,000, the market yield for bonds of similar risk and maturity was 7%. The bonds mature December 31, 2024 (4 years). Interest is paid semiannually on June 30 and December 31. Required: 1. Determine the price of the bonds at January 1, 2021. 2. Prepare the journal entry to record their issuance by Patey on

Answer 1

Answer:

The price of the bonds $579,378.13

Journal entry:

Dr cash $579,378.13

Dr discount on  bonds payable $20,621.87

Cr bonds payable $600,000.00

Explanation:

Using a financial calculator, we determine the bond price by using the following inputs:

N=8(number of semiannual coupons in 4 years=4*2=8)

PMT=18000 (semiannual coupon=face value*coupon rate*6/12= $600,000*6%*6/12=$18000)

I/Y=3.5(semiannual yield=7%*6/12=3.5%)

FV=600000( the face value is $600,000)

CPT PV=$579,378.13  

Bond discount=face value-bond price

Bond discount=$600,000-$579,378.13

Bond discount=$20,621.87  

The double entries are to debit cash and discount on bonds payable with $579,378.13 and $20,621.87  respectively while bonds payable is credited with the face value of $600,0000