On
May 1, 2011, Jadeja Corporation, a publicly listed corporation, issued $200,000
of five-year, 8% bonds, with interest payable semi-annually on November 1 and
May 1. The bonds were issued to yield a market interest rate of 6%. Jadeja uses
the effective interest method.
(a)
Calculate the present value (issue price) of the bonds on May 1.
(b)
Record the issue of the bonds on May 1.
(c)
Prepare the journal entry to record the first and second interest payments on
November 1, 2011, and May 1, 2012.
(a)
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Present
value of the principal
|
|
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$200,000 X .74409
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$148,818
|
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Present
value of the interest payments
|
|
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$8,000 X 12.46221
|
68,242
|
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Issue price
|
$217,060
|
|
Excel formula: =PV(rate,nper,pmt,fv,type)
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Using a financial
calculator:
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||
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PV
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?
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Yields $ 217,060.14
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|
I
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3%
|
|
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N
|
10
|
|
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PMT
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$ (8,000)
|
|
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FV
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$ (200,000)
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|
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Type
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0
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|
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(b)
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Cash ...............................................................................................
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217,060
|
|
|
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Bonds Payable...................................................................
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217,060
|
|
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|
|
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(c)
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Interest
Expense
($217,060 X 6% X 6/12)...............................................................
|
6,512
|
|
|
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Bonds
Payable ($8,000 – $6,512)...............................................
|
1,488
|
|
|
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Cash ($200,000 X 8% X 6/12)..........................................
|
|
8,000
|
|
|
|
|
|
|
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Interest
Expense
[($217,060 – $1,488) X 6% X 6/12]............................................
|
6,467
|
|
|
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Bonds
Payable ($8,000 – $6,467)...............................................
|
1,533
|
|
|
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Cash ($200,000 X 8% X 6/12)..........................................
|
|
8,000
|
