91Ó°ÊÓ

Determining the present value of bonds payable and journalizingusing the effective-interest amortization methodBrad Nelson, Inc. issued \(600,000 of 7%, six-year bonds payable on January 1, 2018.

The market interest rate at the date of issuance was 6%, and the bonds pay interestsemiannually.

Learning Objectives 2, 3, 4

3. June 30, 2018, InterestExpense \)25,200

Learning Objectives 2, 3, 4

June 30, 2018, Interest Expense$37,750

C H A P T E R 1 2

Requirements

1. How much cash did the company receive upon issuance of the bonds payable?(Round to the nearest dollar.)

2. Prepare an amortization table for the bond using the effective-interest method,through the first two interest payments (Round to the nearest dollar.)

3. Journalize the issuance of the bonds on January 1, 2018, and the first and secondpayments of the semiannual interest amount and amortization of the bonds onJune 30, 2018, and December 31, 2018. Explanations are not required.

Step by step solution

01

Definition of present value

The present value means the current worth of the money in present for the amount which will collected in future.

02

Journal entries

Date	Particulars	Debit	Credit
January 1, 2018	Cash	$611,862
	Premium on Bonds		$11,000
	Bonds Payable		$600,000
	(Being entry for the issue of the bonds)
June 30, 2018	Interest Expense	$21,000
	Premium on bonds	$415.17
	Cash		$21,415.17
	(Being entry for the payment of interest)
December 31, 2018	Interest Expense	$21,000
	Discount on Bonds	$400.63
	Cash		$21,400.63
	(Being entry for the payment of interest)

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