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Compute the issue price of the bonds of Pluto corp issues P560,000 of 9% bonds, due in 9 years, with interest payable semiannually. At the time of issue, the market rate for such bonds is 10%.

Compute the issue price of the bonds of Pluto corp issues P560,000 of 9% bonds, due in 9 years, with interest payable semiannually. At the time of issue, the market rate for such bonds is 10%.

Financial Accounting: The Impact on Decision Makers
Financial Accounting: The Impact on Decision Makers
10th Edition
ISBN:9781305654174
Author:Gary A. Porter, Curtis L. Norton
Publisher:Gary A. Porter, Curtis L. Norton
Chapter10: Long-term Liabilities
Section: Chapter Questions
Problem 10.1KTQ
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**Example Bond Issue Price and Journal Entries Calculation for an Educational Website** --- ### Bond Issue Price Calculation and Journal Entries **Educational Content for Understanding Bonds** In this exercise, we will calculate the issue price of bonds and illustrate how to make the necessary journal entries using the effective-interest method. This example will help students understand the financial accounting concepts related to bond issuance and interest payments. **Problem Statement** **Scenario 1:** Compute the issue price of the bonds of Pluto Corp. Pluto Corp issues P650,000 of 9% bonds, due in 9 years, with interest payable semiannually. At the time of issuance, the market rate for such bonds is 10%. **Solution:** To find the issue price of the bonds, we need to calculate the present value (PV) of the future cash flows, i.e., the semiannual interest payments and the principal repayment at maturity. These cash flows are discounted using the market interest rate. **Scenario 2:** On January 1, 2019, Venus Ind. issued P690,000 of 9% bonds, due in 10 years. The bonds were issued for P647,006 and pay interest each July 1 and January 1. Venus Ind. uses the effective-interest method. **Required:** Prepare journal entries for the following transactions: (a) The January 1 issuance (b) The July 1 interest payment (c) The December 31 adjusting entry Assume an effective interest rate of 10%. **Solution:** **Journal Entries:** 1. **January 1 Issuance:** - **Debit**: Cash P647,006 - **Debit**: Discount on Bonds Payable P42,994 (P690,000 - P647,006) - **Credit**: Bonds Payable P690,000 2. **July 1 Interest Payment:** Calculate the interest expense for the first semiannual period using the effective-interest rate: - **Interest Expense** = P647,006 * 5% = P32,350.30 Actual interest payment: - **Interest Payment** = P690,000 * 4.5% = P31,050 Amortization of the bond discount: - **Discount Amortization** = P32,350.30 - P31,050 = P1,300.30 - **Journal Entry
Transcribed Image Text:**Example Bond Issue Price and Journal Entries Calculation for an Educational Website** --- ### Bond Issue Price Calculation and Journal Entries **Educational Content for Understanding Bonds** In this exercise, we will calculate the issue price of bonds and illustrate how to make the necessary journal entries using the effective-interest method. This example will help students understand the financial accounting concepts related to bond issuance and interest payments. **Problem Statement** **Scenario 1:** Compute the issue price of the bonds of Pluto Corp. Pluto Corp issues P650,000 of 9% bonds, due in 9 years, with interest payable semiannually. At the time of issuance, the market rate for such bonds is 10%. **Solution:** To find the issue price of the bonds, we need to calculate the present value (PV) of the future cash flows, i.e., the semiannual interest payments and the principal repayment at maturity. These cash flows are discounted using the market interest rate. **Scenario 2:** On January 1, 2019, Venus Ind. issued P690,000 of 9% bonds, due in 10 years. The bonds were issued for P647,006 and pay interest each July 1 and January 1. Venus Ind. uses the effective-interest method. **Required:** Prepare journal entries for the following transactions: (a) The January 1 issuance (b) The July 1 interest payment (c) The December 31 adjusting entry Assume an effective interest rate of 10%. **Solution:** **Journal Entries:** 1. **January 1 Issuance:** - **Debit**: Cash P647,006 - **Debit**: Discount on Bonds Payable P42,994 (P690,000 - P647,006) - **Credit**: Bonds Payable P690,000 2. **July 1 Interest Payment:** Calculate the interest expense for the first semiannual period using the effective-interest rate: - **Interest Expense** = P647,006 * 5% = P32,350.30 Actual interest payment: - **Interest Payment** = P690,000 * 4.5% = P31,050 Amortization of the bond discount: - **Discount Amortization** = P32,350.30 - P31,050 = P1,300.30 - **Journal Entry
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