1944 and Bonds Payable

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  • Topic: 1944, 1941, 1971
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Problem 3
On March 1, 2002, Pyne Furniture Co. issued $700,000 of 10 percent bonds to yield 8 percent. Interest is payable semiannually on February 28 and August 31. The bonds mature in ten years. Pyne Furniture Co. is a calendar-year corporation.

(1)   Determine the issue price of the bonds. Show your computations. (2)   Prepare an amortization table through the first two interest periods using the effective-interest method. (3)   Prepare the journal entries to record bond-related transactions as of the following dates: (a)   March 1, 2002

(b)   August 31, 2002
(c)   December 31, 2002
(d)   February 28, 2003

Solution 3
LO4
(1)   Calculation of bond sale price: i = 4% n = 20
   Present value of the face amount ($700,000 x .4564)    $319,480    Present value of the interest ($35,000 x 13.5903) 475,661              $795,141

(2)   Amortization table:
         InterestInterest    Amortization Carrying    Date    Payment   Expense of Premium    Value    3/1/2002               $795,141
   8/31/2002 $35,000   $31,806   * $3,194    791,947    2/28/2003 35,000   31,678   ** 3,322    788,625

      
Computations:
      *   $795,141 x 4% = $31,806
      ** $791,947 x 4% = $31,678
      
   (3)   Journal entries:
   (a)3/1/2002 Cash       795,141
         Premium on Bonds Payable 95,741
         Bonds Payable       700,000

   (b)8/31/2002 Interest Expense    31,806
         Premium on Bonds Payable 3,194
         Cash          35,000

   (c)12/31/2002Interest Expense ($31,678 x 4/6) 21,119
       Premium on Bonds Payable ($3,322 x 4/6)2,215
         Interest Payable ($35,000 x 4/6) 23,334

   (d)Assuming no reversing entries:
    2/28/2003Interest Payable      23,334
       Premium on Bonds Payable    1,107
       Interest Expense      10,559
         Cash          35,000...
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