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Chapter 12: Q37PGA_2 (page 664)

Determining the present value of bonds payable and journalizingusing the effective-interest amortization methodBrad 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 interestsemiannually.

Learning Objectives 2, 3, 4

3. June 30, 2018, InterestExpense \)25,200

Learning Objectives 2, 3, 4

June 30, 2018, Interest Expense$37,750

C H A P T E R 1 2

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 secondpayments of the semiannual interest amount and amortization of the bonds onJune 30, 2018, and December 31, 2018. Explanations are not required.

Short Answer

Expert verified

The carrying amount of the bonds on December 31, 2018, is $611,046.20

Step by step solution

01

Definition of present value

The present value means the current value of the sum of the amount receivable in the future.

02

Amortization table

Period

Interest Expense

Cash Paid

Amortization amount

Carrying amount

January 1, 2018

$611,862

June 30, 2018

$21,000

$21,415.17

$415.17

$611,446.83

December 31, 2018

$21,000

$21,400.63

$400.63

$611,046.20

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Most popular questions from this chapter

Retiring bonds payable before maturity

CoastalView Magazineissued $600,000 of 15-year, 5% callable bonds payable on July

31, 2018, at 94. On July 31, 2021, CoastalViewcalled the bonds at 101. Assume annual

interest payments.

Requirements

1. Without making journal entries, compute the carrying amount of the bonds payable

at July 31, 2021.

2. Assume all amortization has been recorded properly. Journalize the retirement of

the bonds on July 31, 2021. No explanation is required.

Determining bond amounts

Savvy Drive-Ins borrowed money by issuing $3,500,000 of 9% bonds payable

at 99.5. Interest is paid semiannually.

Requirements

1. How much cash did Savvy receive when it issued the bonds payable?

2. How much must Savvy pay back at maturity?

3. How much cash interest will Savvy pay each six months?

When a bond is issued, what is its present value?

Determine whether the following bonds payable will be issued at face value, at a premium, or at a discount:

3. A 10% bonds payable is issued when the market interest rate is 8%.

4. A 10% bonds payable is issued when the market interest rate is 10%.

5. A 10% bonds payable is issued when the market interest rate is 12%.

Journalizing liability transactions and reporting them on the balance

sheet

The following transactions of Johnson Pharmacies occurred during 2018 and 2019:

2018

Mar. 1 Borrowed \(450,000 from Coconut Creek Bank. The 15-year, 5% note requires

payments due annually, on March 1. Each payment consists of \)30,000 principal

plus one year’s interest.

Dec. 1 Mortgaged the warehouse for \(250,000 cash with Saputo Bank. The mortgage

requires monthly payments of \)8,000. The interest rate on the note is 12% and

accrues monthly. The first payment is due on January 1, 2019.

31 Recorded interest accrued on the Saputo Bank note.

31 Recorded interest accrued on the Coconut Creek Bank note.

2019

Jan. 1 Paid Saputo Bank monthly mortgage payment.

Feb. 1 Paid Saputo Bank monthly mortgage payment.

Mar. 1 Paid Saputo Bank monthly mortgage payment.

1 Paid first installment on note due to Coconut Creek Bank.

Requirements

1. Journalize the transactions in the Johnson Pharmacies general journal. Round to

the nearest dollar. Explanations are not required.

2. Prepare the liabilities section of the balance sheet for Johnson Pharmacies on

March 1, 2019 after all the journal entries are recorded.
See all solutions

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