Chapter 10, Problem 6PSA

1.

Summary Introduction

Introduction: A bond refers to a security generally used for a debt investment under which an investor finances money to an entity for a specific time period at a fixed rate of interest.

To determine: Total amount of each installment payment.

Answer to Problem 6PSA

An installment refers to the liability that forces the borrowers to repay the borrowed amount to the lenders in a series of periodic payments.

Total amount of each installment is $\$50,091$

Explanation of Solution

Computation of the amount pertaining to the notes payment is shown below:

  $\begin{array}{l}AnnualPayment=\mathrm{Pr}esentValueofnote/PVFA\\ =\$200,000/3.403\\ =\$50,091\end{array}$

Present value of $8\%$ is $0.6806$

  $\begin{array}{l}PVFA=\mathrm{Pr}esentValue\times No.ofyears\\ =0.6806\times 5=3.9927\end{array}$

2.

Summary Introduction

Introduction: A bond refers to a security generally used for a debt investment under which an investor finances money to an entity for a specific time period at a fixed rate of interest.

To determine: The computation of the statement showing the amortization amount.

Answer to Problem 6PSA

Amortization table and amount showing that is $\$46,382$

Explanation of Solution

The computation of the statement showing the amortization amount is shown below:

Period Ending Date	Beginning Balance	Debit Interest Expense $8\%$	Debit Notes Payable	Credit Cash	Ending Balance
31/10/206	$\$200,000$	$\begin{array}{l}\$200,000\times 8\%\\ =\$16,000\end{array}$	$\begin{array}{l}\$50,091-\$16,000\\ =\$34,091\end{array}$	$\$50,091$	$\begin{array}{l}\$200,000-\$34,091\\ =\$16,5909\end{array}$
31/10/2017	$\$165,909$	$\begin{array}{l}\$165,909\times 8\%\\ =\$13,273\end{array}$	$\begin{array}{l}\$50,091-\$13,273\\ =\$36,818\end{array}$	$\$50,091$	$\begin{array}{l}\$165,909-\$36,818\\ =\$129,091\end{array}$
31/10/2018	$\$129,091$	$\begin{array}{l}\$129,091\times 8\%\\ =\$10,327\end{array}$	$\begin{array}{l}\$50,091-\$10,327\\ =\$39,764\end{array}$	$\$50,091$	$\begin{array}{l}\$129,091-\$39,764\\ =\$89,327\end{array}$
31/10/2019	$\$89,327$	$\begin{array}{l}\$89,327\times 8\%\\ =\$7,146\end{array}$	$\begin{array}{l}\$50,091-\$7,146\\ =\$42,945\end{array}$	$\$50,091$	$\begin{array}{l}\$89,327-\$42,945\\ =\$46,382\end{array}$
31/10/2020	$\$46,382$	$\begin{array}{l}\$46,382\times 8\%\\ =\$3,709\end{array}$	$\begin{array}{l}\$50,091-\$3,709\\ =\$46,382\end{array}$	$\$50,091$	$\begin{array}{l}\$46,382-\$46,382\\ =\$0\end{array}$
Total		$\$50,455$	$\$200,000$	$\$250,455$

3.

Summary Introduction

Introduction: A bond refers to a security generally used for a debt investment under which an investor finances money to an entity for a specific time period at a fixed rate of interest.

To determine: Prepare the journal entry to record the interest and amortization.

Answer to Problem 6PSA

To record premium amortization and interest of 6 months.

Explanation of Solution

Date	Particulars	Debit	Credit
31Dec	Bond Interest Expense$\begin{array}{l}(\$200,000\times 8\%)*2/12=\$2,667\\ \end{array}$	$\$2,667$
	Interest Expense		$\$2,667$
	(To record the interest and premium amortization for six months)

Date	Particulars	Debit	Credit
31Oct	Bond Interest Expense$\begin{array}{l}(\$200,000\times 8\%)-\$2,667=\$13,333\\ \end{array}$	$\$13,333$
	Interest payable	$\$2,667$
	Notes payable$(\$50,091-\$16,000)=\$34,091$	$\$34,091$
	Cash		$\$50,091$
	(To record initial payment towards the installment note)