Question

1.A company borrowed cash from the bank by signing a 6-year, 7% installment note. The present value of an annuity factor at 7% for 6 years is 4.7665. The present value of a single sum at 7% for 6 years is .6663. Each annual payment equals $76,200. The present value of the note is:

a) $47,959.72
b) $15,986.57
c) $457,200.00
d) $363,207.30
e) $114,362.90

2.A company issued 8%, 15-year bonds with a par value of $610,000 that pay interest semiannually. The market rate on the date of issuance was 8%. The journal entry to record each semiannual interest payment is

a) Debit Bond Interest Expense $24,400; credit Cash $24,400.
b) Debit Bond Interest Expense $48,800; credit Cash $48,800.
c) Debit Bond Interest Payable $40,667; credit Cash $40,667.
d) Debit Bond Interest Expense $560,000; credit Cash $560,000.
e) No entry is needed, since no interest is paid until the bond is due.

3.On January 1, Parson Freight Company issues 9.0%, 10-year bonds with a par value of $2,900,000. The bonds pay interest semiannually. The market rate of interest is 10.0% and the bond selling price was $2,702,942. The bond issuance should be recorded as:

a) Debit Cash $2,900,000; credit Bonds Payable $2,900,000.
b) Debit Cash $2,702,942; credit Bonds Payable $2,702,942.
c)Debit Cash $2,900,000; credit Bonds Payable $2,702,942; credit Discount on Bonds Payable $197,058.
d) Debit Cash $2,702,942; debit Discount on Bonds Payable $197,058; credit Bonds Payable $2,900,000.
e) Debit Cash $2,702,942; debit Interest Expense $197,058; credit Bonds Payable $2,900,000.

Answer 1

Answer 1 d) $363,207.30

Explanation : Present value of the note =   Annual payment * PVIFA _{(7 % , 6 years)}

= $76,200 * 4.7665 = $363,207.30

Answer 2. a) Debit Bond Interest Expense $24,400; credit Cash $24,400.

Explanation : Interest to be paid semiannualy =  $610,000 * 8% * 6 / 12 = $24,400

Thus entry for each semiannual interest payment is :

	Debit($)	Credit ($)
Interest Expense	24,400
Cash		24,400

Answer 3 d) Debit Cash $2,702,942; debit Discount on Bonds Payable $197,058; credit Bonds Payable $2,900,000.

Explanation : Cash received on issuance of bonds = $2,702,942 ;

Par value of bonds = $2,900,000 ;

Discount on bonds issued = $2,900,000 - $2,702,942 = $197,058

Journal entry on bond issuance should be

Date	Particulars	Debit ($)	Credit ($)
January 1	Cash	2,702,942
	Discount on Bonds Payable	197,058
	Bonds Payable		2,900,000