Reporting Financial Statement Effects of Bond Transactions On January 1, 2016, M

Question

Reporting Financial Statement Effects of Bond Transactions On January 1, 2016, 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 Present value of interest payments Selling price of bonds b. Prepare journal entries to record the bond issuance, semiannual interest payment and discount amortization on June 30, 2016, and semiannual interest payment and discount amortization on December 31, 2016. Use the effective interest rate method. (Round your answers to the nearest dollar.)

Explanation / Answer

There are two semiannual month in a year so semi annual interst=250000*.08*6/12 = 10000

semiannual month = 9 * 2 =18

Semiannual yeild = 10% * 6/12 = 5%

present value annuity factor can be find from annuity table and present value factor can be find from present value table. at 5% for 18 periods

b).

carrying value of bond after first semiannual payment : 220776+1039= 221815

Present value of principle repayment PVF5% , 18 * Facevalue .41552 * 250000 103880 Present value of interest PVA5% , 18 * Interest 11.68959 * 10000 116895.9 Bound issue price 220776

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