On January 1, 2019, Gleason Corp. issued $700,000, 8% bonds payable to finance c
ID: 2603880 • Letter: O
Question
On January 1, 2019, Gleason Corp. issued $700,000, 8% bonds payable to finance company expansion. The bonds were dated January 1, 2019 and mature in four years on January 1, 2023. The bonds pay interest semi-annually each June 30th and December 31st. At the time of issuance, the market rate of interest for similarly risky investments was 6%.
1. At what amount were the bonds issued on January 1, 2019?
2. Prepare an amortization schedule for the life of the bonds using the effective interest method of amortization.
3. Assuming Gleason Corp.’s fiscal year ends May 31st, prepare all necessary entries written during the calendar year 2019 (i.e. from January 1, 2019 through December 31, 2019) related to the bonds.
4. Gleason retired 25% of the bonds on January 1, 2021. Prepare the entry for the retirement, assuming the bonds were retired at 102.
Check figures
Q1, Issue Price: $749,138
Q4, Gain on Bond Retirement: $ 3,005
please show work, thank you!
Explanation / Answer
solution a:- present value of future interest payable = semi annual interest*present value annuity factor @3% for 8 years
700000*4%*7.0196=196551
present value of face value of debentures=700000* present value factor @ 3%, 8 period
700000*.789=552300
issue price of debentures= present value of principal+ present value of interest payments
552300+196551=$748851
* answer is little different due to the rounding off errors.
2.
date interest paid effective interest rate interest expenses amortization present value of bonds 2019 jan 1 748851 june 30 28000 3% 22465 5535 743316 dec 31 28000 3% 22300 5700 737615 2020 june 30 28000 3% 22128 5872 731743 dec 31 28000 3% 21952 6048 725695 2021 june 30 28000 3% 21771 6229 719466 dec 31 28000 3% 21584 6416 713050 2022 june 30 28000 3% 21392 6608 706442 dec 31 28000 3% 21558 6442 700000