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Chapter 12: Q8RQ (page 654)
When a bond is issued, what is its present value?
The long term-debt is a debt that is not due in one year.
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Journalizing bond issuance and interest payments
On June 30, Parker Company issued 11%, five-year bonds payable with a face value
of $120,000. The bonds are issued at face value and pay interest on June 30 and
December 31.
Requirements
1. Journalize the issuance of the bonds on June 30.
2. Journalize the semiannual interest payment on December 31
Your grandfather would like to share some of his fortune with you. He offers to give
you money under one of the following scenarios (you get to choose):
1. \(8,750 per year at the end of each of the next six years
2. \)49,650 (lump sum) now
3. $100,450 (lump sum) six years from now
C H A P T E R 1 2
Requirements
1. Calculate the present value of each scenario using a 6% discount rate. Which scenario
yields the highest present value? Round to the nearest dollar.
2. Would your preference change if you used a 12% discount rate?
Reporting liabilities
At December 31, MediStat Precision Instruments owes \(52,000 on Accounts
Payable, Salaries Payable of \)12,000, and Income Tax Payable of \(10,000. MediStat
also has \)300,000 of Bonds Payable that were issued at face value that require
payment of a \(35,000 installment next year and the remainder in later years. The
bonds payable require an annual interest payment of \)4,000, and MediStat still
owes this interest for the current year. Report MediStat’s liabilities on its classified
balance sheet on December 31, 2018.
Computing the debt to equity ratio
Ludwig Corporation has the following data as of December 31, 2018:
Total Current Liabilities \( 36,210 Total Stockholders’ Equity \) ?
Total Current Assets 58,200 Other Assets 36,800
Long-term Liabilities 139,630 Property, Plant, and Equipment, Net 206,440
Compute the debt to equity ratio at December 31, 2018.
Using the effective-interest amortization method
On December 31, 2018, when the market interest rate is 6%, Benson Realty issues
\(700,000 of 6.25%, 10-year bonds payable. The bonds pay interest semiannually. Benson
Realty received \)713,234 in cash at issuance.
Requirements
1. Prepare an amortization table using the effective interest amortization method for
the first two semiannual interest periods. (Round to the nearest dollar.)
2. Using the amortization table prepared in Requirement 1, journalize issuance of the
bonds and the first two interest payments.
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