Question

On January 1, 2019, Gleason Corp. issued $700,000, 8% bonds payable to finance company expansion. The bonds were dated January 1, 2019 and mature in four years on January 1, 2023. The bonds pay interest semi-annually each June 30th and December 31st. At the time of issuance, the market rate of interest for similarly risky investments was 6%.

1. At what amount were the bonds issued on January 1, 2019?

2. Prepare an amortization schedule for the life of the bonds using the effective interest method of amortization.

3. Assuming Gleason Corp.’s fiscal year ends May 31st, prepare all necessary entries written during the calendar year 2019 (i.e. from January 1, 2019 through December 31, 2019) related to the bonds.

4. Gleason retired 25% of the bonds on January 1, 2021. Prepare the entry for the retirement, assuming the bonds were retired at 102.

Check figures

Q1, Issue Price: $749,138

Q4, Gain on Bond Retirement: $ 3,005

please show work, thank you!

Answer 1

solution a:- present value of future interest payable = semi annual interest*present value annuity factor @3% for 8 years

700000*4%*7.0196=196551

present value of face value of debentures=700000* present value factor @ 3%, 8 period

700000*.789=552300

issue price of debentures= present value of principal+ present value of interest payments

552300+196551=$748851

* answer is little different due to the rounding off errors.

2.

date	interest paid	effective interest rate	interest expenses	amortization	present value of bonds
2019 jan 1					748851
june 30	28000	3%	22465	5535	743316
dec 31	28000	3%	22300	5700	737615
2020 june 30	28000	3%	22128	5872	731743
dec 31	28000	3%	21952	6048	725695
2021 june 30	28000	3%	21771	6229	719466
dec 31	28000	3%	21584	6416	713050
2022 june 30	28000	3%	21392	6608	706442
dec 31	28000	3%	21558	6442	700000