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Buzzy Company sold $400,000 worth of 12%, ten year bonds on July1st, 2019, at a time...

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Accounting

Buzzy Company sold $400,000 worth of 12%, ten year bonds onJuly1st, 2019, at a time when the market rate of interest onsimilar investments was 10%. The semiannual bonds pay interest onDecember 31st and June 30th . (a) Using the appropriate PresentValue Table(s), determine the amount the bonds should sell for;their present value. (b) Journalize the necessary entry for thesale of the bonds. (c) Journalize the first interest payment onDecember 31, 2019 including the discount (or premium?) amortizationassuming the company makes use of the straight-line method of bondinterest amortization.

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4.2 Ratings (508 Votes)

Solution a:

Chart Values are based on:
n= (10 Years*2) 20 Half years
i= (10%/2) 5% Semi annual
Cash Flow Table Value * Amount = Present Value
Par (Maturity) Value 0.376889 * $4,00,000 = $1,50,756
Interest (Annuity) [$400,000*12%*6/12] 12.462210 * $24,000 = $2,99,093
Price of Bonds $4,49,849

Solution (b):

(b) Journal Entries - Buzzy Company
Date Particulars Debit Credit
01-Jul-19 Cash A/c Dr $4,49,849
      To bonds payable $4,00,000
      To Premium on Bond Payable $49,849
(Being bond issued at Premium)

Solution (c):

(c ) Journal Entries - Buzzy Company
Date Particulars Debit Credit
31-Dec-19 Interest Expense Dr $21,508
Premium on Bond Payable ($49849/20) $2,492
      To Cash ($400,000*12%*6/12) $24,000
(To record first payment of Interest and Amortization of Premium on issue)

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