Question

(Please show work, explain the reasoning, and table used to reach answer)

Foster Incorporated sold $500,000 of 10% bonds on January 1, 2018 for a price that yields a 12% interest rate. The bonds pay interest semi-annually on June 30 and December 31. The bonds are due December 31, 2022. Foster uses the effective interest method. Instructions:

1: Determine the selling price of the bonds on January 1, 2018

2: Prepare an amortization schedule using the effective interest method

3: Prepare the journal entries for 2018.

4: Assume the company reacquired the bonds on July 1, 2022, at 104 and prepare the journal entry to record the retirement of the bonds.

5: Assume Foster uses the straight-line method to amortize premiums or discounts. Prepare the journal entry for June 30, 2018 to record interest expense.

Answer 1

Ans. 1

Notes-

1.Period taken are 10 semi annum years i.e. 5 years*2

2.Interest Per annum =50000 , for semi annum 25,000

3.Rate for the year(yield) = 12%, for semi annum =6%

4. Calculation of PV = 1/(1+Rate)^Year

		6%
Years	Value	PV factor	PV *Value
1	25000	0.9434	23584.9
2	25000	0.8900	22249.9
3	25000	0.8396	20990.5
4	25000	0.7921	19802.3
5	25000	0.7473	18681.5
6	25000	0.7050	17624.0
7	25000	0.6651	16626.4
8	25000	0.6274	15685.3
9	25000	0.5919	14797.5
10	25000	0.5584	13959.9
10	500000	0.5584	279197.4
Price of Bond as on 1.1.2018			463199.6