A1_Check_Numbers
Assignment #1
Check Numbers
1. Case b – Bond price $1,134,654
(Be careful with these; it is easy to make a mistake)
2. Case b – Issuer’s Interest Expense: $7,000
(Issuer – use gross method; Investor – use the net method)
3. Issuer entries – Premium on Bonds Payable at creation is $109,882 and at issuance is $103,481
(i.e., $109,882 - $6,401 (for the first 3 months))
(Issuer – use gross method; Investor – use the net method)
4. Effective Interest for 2021 (i.e., interest expense for 2021): $14,691 (i.e., 19,588 x 9/12)
ACCTG472_A1
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THE PENNSYLVANIA STATE UNIVERSITY
Accounting 472
Intermediate Financial Accounting II – Spring 2021
Assignment #1
GENERAL INSTRUCTIONS:
This assignment is due on Tuesday, Fe
uary 2nd at 5:00 p.m. Please submit your solution on
Canvas using Excel by 5:00 p.m. on the due date. Note that late assignments will not be
accepted.
Problem #1
Bond pricing
Wright Corporation is considering the issuance of bonds with different coupon rates and different
market rates of interest. For each of the following cases compute the price of the bond (to the
nearest dollar):
REQUIRED:
a. Issue $1,000,000 bonds that pay interest semiannually, at an annual rate of 8%. The
market rate of interest on an annual basis is 4%. The bonds mature in 5 years.
. Issue $1,000,000 bonds that pay interest annually, at an annual rate of 6%. The market
ate of interest on an annual basis is 4%. The bonds mature in 8 years.
c. Issue $1,000,000 bonds that pay interest semiannually, at an annual rate of 4%. The
market rate of interest on an annual basis is 4%. The bonds mature in 3 years.
d. Issue $1,000,000 bonds that pay interest annually, at an annual rate of 2%. The market
ate of interest on an annual basis is 5%. The bonds mature in 10 years.
Problem #2
Issuer and investor journal entries (Straight-line amortization)
Babcock Incorporated issued bonds to White Corporation on January 1, 2021 with following
terms: 5-year maturity, annual coupon rate of 6%, pays interest on June 30 and December 31,
$200,000 principal. Consider three different cases: (a) issued at par, (b) issued at 95, and (c)
issued at 102.
REQUIRED:
Assume that White Corporation intends to hold to maturity (see Chapter 12 notes) the bonds.
Prepare the journal entries required on January 1, 2021, and on June 30, 2021, for both parties.
Use straight-line amortization to record interest.
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Problem #3
Issuer and investor journal entries (Effective interest method)
Kyle Corporation issued $500,000 in bonds to Du Incorporated on March 31, XXXXXXXXXXThe bonds
were created on January 1, 2021, but were not issued until later due to problems selling the bonds
in the market. The bonds mature on December 31, XXXXXXXXXXThe bonds pay interest at an annual
ate of 10 percent. The interest payment dates are each June 30 and December 31. The market
ate of interest is 4 percent. Du Incorporated paid $615,981 for the bonds ($12,500 of accrued
interest and $603,481 for the fair value of the bonds—i.e., $609,882 less $6,401 of implicit
amortization from January 1 to March 31). The amortization of the bonds using the effective
interest method from March 31 to June 30 is $6,401 (i.e., 50 percent of the amount for the first
six months). The fair value of the bonds on January 1, 2021, is $609,882.
REQUIRED:
a. Using the effective interest method, complete the remainder of the amortization schedule
from issuance through maturity.
Cash
Payment
Effective
Interest
Premium
Amortization
Ca
ying
Value
Date
1/1/ XXXXXXXXXXDate created) $609,882
6/30/21 $25,000 $12,198 $12,802 $597,080
. Using the effective interest method, prepare the journal entries required on March 31,
2021, June 30, 2021, and December 31, 2021, for both parties. Du Inc. intends to hold
the bonds to maturity.
c. Instead of using the effective interest method, compute the amount of monthly
amortization for each party using straight-line amortization.
Problem #4
Zero-Interest note with early extinguishment
On March 31, 2021, Collins Incorporated issued a long-term note to Jenkins Federal Bank. The
$500,000 note does not pay coupon payments but the issue price reflects a 5% market rate of
interest. The note matures in five years. On December 31, 2022, Collins Incorporated paid off
the note early. Jenkins Federal Bank does not charge a penalty for early repayments.
REQUIRED:
a. Calculate the present value of the note at issuance and, using the effective interest
method, complete an amortization schedule from issuance through maturity.
. Using the effective interest method, prepare the journal entries required on March 31,
2021, and December 31, 2022, for both parties to record the issuance, interest for 2022
and the early extinguishment of the note at the end of XXXXXXXXXXThe settlement of the note
equires Collins Incorporated to pay off the note at its ca
ying value at the end of 2022.