Question

Serotta Corporation is planning to issue bonds with a face value of $470,000 and a coupon rate of 12 percent. The bonds mature in two years and pay interest quarterly every March 31, June 30, September 30, and December 31. All of the bonds were sold on January 1 of this year. Serotta uses the effective-interest amortization method and also uses a premium account. Assume an annual market rate of interest of 8 percent. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.)

1. Provide the journal entry to record the issuance of the bonds January 1. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your final answers to nearest whole dollar amount.)

Debit Credit

Cash __________

Bonds Payable __________

Bond Premium __________

Answer 1

Quarterly cash interest = 470000*12%*3/12 = 14100
n = 8
i=2%
Cashflows		Amount	PVF	Present Value
Quarterly cash interest	14100	7.32548	103289.3
Maturity amount		470000	0.85349	401140.3
Price of bonds				504429.6
Journal entries
S.no.	Accounts title and explanations		Debit $	Credit $
a.	Cash				504430
	Bonds payable				470000
	Premium on bonds payable			34430
	(For issuance of bonds)