Question

On January 1st 2001, Patterson Inc. issued bonds with a total face value of $4,000,000 (4 million), a 9% coupon rate and a life of 12 years. The market rate of interest for these bonds is 10% per year on the date of issue. The coupon payment is made annually on December 31.

(a) What is the bond payable balance that Patterson should report on its balance sheet dated January 1st 2002?

(b) What is the interest expense that Patterson should report on its calendar year 2002 income statement?

(c) On January 1st 2006 Patterson buys back from the market 30% of the bonds that it had issued i.e. it buys back bonds with a face value of 1.2 million. The market rate of interest on January 1st 2006 for Patterson’s bonds is 12% per year. Prepare the journal entry that Patterson should record on January 1st 2006.

(d) What is the amount of interest expense that Patterson should report on its 2006 income statement?

Answer 1

a)Bond Payable: $40,00,000

b) Interest Expense: ( $4000000X9%)=$360000

c) & D)
Date	Accounting Entry	Debit	Credit
January 1st 2006	Bond Payable	1200000
	To Cash / Bank A/c		1200000
	(Being buys back bonds with a face value.)
December 31st 2006	Interest Expenses	108000
	To Interest Payable		108000
	(Being Interest accrued for the year 2006)
December 31st 2006	Interest Payable	108000
	To Cash / Bank A/c		108000
	(Being Interest paid for the year 2006)