Chapter 14, Problem 14.9E

Issuance of bonds; effective interest; amortization schedule; financial statement effects

• LO14–2

When Patey Pontoons issued 6% bonds on January 1, 2018, with a face amount of $600,000, the market yield for bonds of similar risk and maturity was 7%. The bonds mature December 31, 2021 (4 years). Interest is paid semiannually on June 30 and December 31.

Required:

1. 1. Determine the price of the bonds at January 1, 2018.
2. 2. Prepare the journal entry to record their issuance by Patey on January 1, 2018.
3. 3. Prepare an amortization schedule that determines interest at the effective rate each period.
4. 4. Prepare the journal entry to record interest on June 30, 2018.
5. 5. What is the amount(s) related to the bonds that Patey will report in its balance sheet at December 31, 2018?
6. 6. What is the amount(s) related to the bonds that Patey will report in its income statement for the year ended December 31, 2018? (Ignore income taxes.)
7. 7. Prepare the appropriate journal entries at maturity on December 31, 2021.