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Question about Comprehensive Bond Problem

Danny Ferry Co. sells $250,000 of 10% bonds on March 1, 2007. the bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2010. The bonds yield 12%. Give entriels through December 21, 2008.

Prepare all the relevant journal entries from the time of sale until the date indicated. Use the effective interest method for discount and premium amortization (construct amortization tables where applicable). Amortize premium or discount on interest dates and at year-end. (Assume that no reversing entries were made).

Solution Preview

Please see the attached file.

Since the bonds are sold at an effective rate of 12%, we first calculate the issue
price as the present value of interest and principal discounted at 12%
We use the PV function to calculate the issue price
Par Value 250,000
Maturity 7 semi annual periods
Interest 12,500 every six months
Yield 6% semi annual
Issue Price $236,044

The journal entries are

03/01/2007 Cash 236,044
Discount on Bonds Payable 13,956
Bonds ...

Solution Summary

The solution explains how to prepare various journal entries relating to this bond issue in an attached Excel file.