Reporting Financial Statement Effects of Bond Transactions On January 1, 2013, M
ID: 2421762 • Letter: R
Question
Reporting Financial Statement Effects of Bond Transactions On January 1, 2013, McKeown, Inc., issued $250,000 of 8%, 9-year bonds for $220,776, yielding a market (yield) rate of 10%. Semiannual interest is payable on June 30 and December 31 of each year. Required a. Show computations to confirm the bond issue price. (Use a calculator or Excel for your calculations. Round your answers to the nearest dollar.) Present value of principal repayment $ Answer Correct Present value of interest payments $ Answer Correct Selling price of bonds $ Answer Correct b. Prepare journal entries to record the bond issuance, semiannual interest payment and discount amortization on June 30, 2013, and semiannual interest payment and discount amortization on December 31, 2013. Use the effective interest rate. (Round your answers to the nearest dollar.) General Journal Date Description Debit Credit 01/01/13 Cash Answer Correct Answer Correct Answer Correct Answer Correct Answer Correct Answer Correct Answer Correct Answer Correct 6/30/13 Answer Correct Answer Incorrect Answer Correct Answer Incorrect Answer Correct Answer Incorrect Cash Answer Correct Answer Correct 12/31/13 Answer Correct Answer Incorrect Answer Correct Answer Incorrect Answer Correct Answer Incorrect Cash Answer Correct Answer Correct c. Post the journal entries from part b to their respective T-accounts. Cash (A) 01/01/13 Answer Correct Answer Correct 06/30/13 Answer Correct Answer Correct 12/31/13 Answer Correct Answer Correct Bonds Payable (L) 01/01/13 Answer Correct Answer Incorrect 06/30/13 Answer Correct Answer Incorrect 12/31/13 Answer Incorrect Answer Correct Interest Expense (E) 01/01/13 Answer Incorrect Answer Correct 06/30/13 Answer Incorrect Answer Correct 12/31/13 Answer Incorrect Answer Incorrect Bond Discount (XL) 01/01/13 Answer Correct Answer Correct 06/30/13 Answer Correct Answer Incorrect 12/31/13 Answer Correct Answer Incorrect d. Record each of the transactions from part b in the financial statement effects template. Balance Sheet Transaction Cash Asset + Noncash Assets = Liabilities - Contra-Liabilities + Contrib. Capital + Earned Capital 1/1/13 Issue bonds at a discount $ Answer Correct + $ Answer Correct = $ Answer Correct - $ Answer Correct + $ Answer Correct + $ Answer Correct 6/30/13 Interest payment on bonds Answer Correct + Answer Correct = Answer Correct - $ Answer Incorrect + Answer Correct + Answer Incorrect 12/31/13 Interest payment on bonds Answer Correct + Answer Correct = Answer Correct - $ Answer Incorrect + Answer Correct + Answer Incorrect Income Statement Revenue - Expenses = Net Income $ Answer Correct - $ Answer Correct = $ Answer Correct Answer Correct - Answer Incorrect = Answer Incorrect Answer Correct - Answer Incorrect = Answer Incorrect
Explanation / Answer
Ans A Price of the bond = c × F × (1 (1 + r)-t)/r+F(1 + r)t C=Interest Rate F= Face Value r=Market Interest Rate Price of Bond= Present value of Interest payments+Present value of the bond Price of Bond 10000*(1-(1.05)^-18)/.05)+250000/(1.05)^18 (10000*(1-.4155)/.05)+250000*.4155 220775 Face vale $250,000 Discount $29,225 Ans B A B C D E F G $ Date Interest Payment @4% Interest expenses at 5%*G Amortization of Bond C-B cr, balance in the a/c Bond Discount a/c Credit balance in the Bond payable Carrying value of Bond F-E Credit cash Debit Interest Expense Bond Discount Jan 1,2013 29224 250000 220776 June 30,2013 10000 11039 1039 28185 250000 221815 Dec,31 2013 10000 11091 1091 27094 250000 222906 Accounts title Dr Cr 1-Jan Cash 220776 Discount on Issue of 9 year bond payable 29224 9 year Bond payble 250000 June 30,2013 Interest Expense 11039 Cash 10000 Discount on Issue of 9 year bond payable 1039 Dec 31 2013 Interest Expense 11091 Cash 10000 Discount on Issue of 9 year bond payable 1091 T-Account Cash Date Particular Amount Date Particular Amount 30-Jun Interest Expense 10000 1-Jan 9 year bOnd payable 220776 31-Dec Interest Expense 10000 Balance carried down 200776 Interest Expense Date Particular Amount Date Particular Amount 30-Jun Cash 10000 31-Dec Cash 10000 30-Jun Discount on Issue of 9 year bond payable 1039 31-Dec Discount on Issue of 9 year bond payable 1091 Discount on Issue of 9 year bond payable Date Particular Amount Date Particular Amount 1-Jan 9 year Bond payble 29224 30-Jun Interest Expense 1039 31-Dec Interest Expense 1091 Balance carried down 27094 9 year bond payable Date Particular Amount Date Particular Amount 1-Jan Cash 220776 Discount on Issue of 9 year bond payable 29224 d) Cash liabilities Issue Bonds at discount Interest Expense 1-Jan 220776 250000 -29224 30-Jun -10000 1039 -11039 31-Dec -10000 1091 -11031