Intermediate Accounting I Practice Problems with AnswersBONDSBonds Payable – Effective Interest Rate Method (Discounted)Buffet Company issued a $250,000 10% bond on 1/1/14 due on 1/1/24 with interest payable on every July 1 and January 1. If investors desire to earn an effective interest rate of 12%, how much do they pay for the bonds? Write journal entries for the issuance of the bond, for the
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Intermediate Accounting I Practice Problems with Answers
BONDS
Bonds Payable – Effective Interest Rate Method (Discounted)
Buffet Company issued a $250,000 10% bond on 1/1/14 due on 1/1/24 with interest payable on every July 1 and January 1. If investors desire to earn an effective interest rate of 12%, how much do they pay for the bonds? Write journal entries for the issuance of the bond, for the first interest payment when paid, and the 2nd interest payment due.
Calculations into the BAII Plus Calculator:
| N | IY | PV | PMT | FV
| 10 x 2 = 20 | 12%/2=6% | 77,951.18 | 0 | 250,000
| 10 x 2 = 20 | 12%/2=6% | 143,374.02 | 25000/2=12500 | 0
| | | 221,325.20 | |
JE 1 – Issuance of Bond
Cash 221,325.20
Bonds Payable 250,000.00
Bonds Discounted 28,674.80
From the BAII Plus calculation
JE 2 – Record first interest payment when paid
Cash 12,500.00
Interest Expense 13,279.51
Bonds Discounted 779.51
(250,000 x 10%)=25,000/2=12,500 (two payments per year from face value of note) – FV int rate
(221,325.20 x 12%)/2 = 13,279.51 (actual market rate interest calc) – Mkt int rate
JE 3 – Record the next interest payment due but not yet paid
Interest Payable 12,500.00
Interest Expense 13,326.24
Bonds Discounted 826.24
(250,000 x 10%) / 2 = 12,500 (two payments per year from face value of note)
((221,325.20+779.51) x 12%) / 2 = 13,326.24
Example 2 Bond – Effective Interest Method Discounted
Evermaster Corp issued a $100,000 Bond at 8% January 1, 2014 due January 1 2019 with interest due July 1 and January 1 each year. Investors require an effective rate of 10%. Calculate the bond proceeds, and complete the journal entries for the issuance, first interest payment, and second interest payment due.
| N | IY | PV | PMT | FV
| 5 x 2 = 10 | 10%/2=5% | 61,391 | 0 | 100,000
| 5 x 2 = 10 | 10%/2=5% | 30,887 | 8000/2=4000 | 0
| | | 92,278 | |
JE Issuance:
Cash 92,278.00
Bonds Payable 100,000.00
Bonds Discounted 7,722.00
JE Interest Payment – First payment when paid
Interest Expense 4,613.90
Bonds Discounted 613.90
Cash 4,000.00
(92,978 x 10%) / 2 = 4,613.90 (paid twice a year)
(100,000 x 8%) / 2 = 4,000.00
JE Next interest payment record amount due
Interest Expense 4,645.00
Bonds Discounted 645.00
Interest Payable 4,000.00
(92,278 + 613.90) x 5% = 4,644.595
((100,000 x 8%) / 2 = 4,000.00
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