PROBLEM 6 - 6

On January 1, 2021, Dumaguete Company issued bonds payable with face amount of P6,000,000 with an
8% effective yield.

The nominal rate of 6% is payable annually on December 31.

The bonds mature on every December 31 each year at the rate P2,000,000 for three years.

Present value of 1 at 8%
One period 0.93
Two periods 0.86
Three periods 0.79

Required:
1. Determine the market price or issue price of the bonds payable.

December 31, 2021

Principal payment 2,000,000
Interest payment (6,000,000 x 6%) 360,000
Total payment - 12/31/2021 2,360,000

December 31, 2022

Principal payment 2,000,000
Interest payment (4,000,000 x 6%) 240,000
Total payment - 12/31/2022 2,240,000

December 31, 2023

Principal payment 2,000,000
Interest payment (2,000,000 x 6%) 120,000
Total payment - 12/31/2023 2,120,000

Present value
December 31, 2021 (2,360,000 x .9259) 2,185,124
December 31, 2022 (2,240,000 x .8573) 1,920,352
December 31, 2023 (2,120,000 x .7938) 1,682,856
Total present value 5,788,332

2. Prepare journal entries for 2021. The effective interest method of amortization is used.

Cash 5,788,332
Discount on bonds payable 211,668
Bonds payable 6,000,000

Interest expense 360,000

Cash (6,000,000 x 6%) 360,000

Interest expense 103,067

Discount on bonds payable 103,067

Interest expense (8% x 5,788,332) 463,067

Interest paid 360,000
Discount amortization 103,067
 Bonds payable 2,000,000
Cash 2,000,000

3. Determine the carrying amount of the bonds payable on December 31, 2021.

Bonds payable - 1/1/2021 6,000,000

Discount on bonds payable -108,601
Principal payment on 12/31/2021 -2,000,000
Carrying amount - 12/31/2021 3,891,399
PROBLEM 6 - 11
On June 1, 2021, Java Company issued 10% bonds payable with face amount of P6,000,000 to yield 12%.

Interest is payable annually on June 1 of each year. The bonds mature in 5 years. The entity follows
calendar year.

PV of 1 at 10% for 5 periods 0.62

PV of 1 at 12% for 5 periods 0.57
PV of an ordinary annuity of 1 at 10% for 5 periods 3.79
PV of an ordinary annuity of 1 at 12% for 5 periods 3.6

Required:
1. Determine the market price of the bonds payable.

PV of principal amount (6,000,000 x .57) 3,420,000

PV of interest (600,000 x 3.60) 2,260,000
Total market price 5,580,000

2. Prepare an effective interest amortization table for the first two interest periods.
Interest Premium Carrying
Date Interest paid expense amortization amount
1/6/2021 5,580,000
1/6/2022 600,000 669,600 69,600 5,649,600
1/6/2023 600,000 667,952 77,952 5,727,552

3. Prepare journal entries for 2021 and 2022.

2021
Jun-01 Cash 5,580,000
Discount on bonds payable 420,000
Bonds payable 6,000,000

Dec-31 Interest expense 350,000

Accrued interest payable
(600,000 x 7/12) 350,000

Interest expense 40,600

Discount on bonds payable
(69,600 x 7/12) 406,000
2022
Jan-01 Accrued interest expense 350,000
Interest expense 350,000

Jun-01 Interest expense 600,000

Cash 600,000

Interest expense 29,000

Discount on bonds payable
(69,600 x 5/12) 29,000

Dec-31 Interest expense 350,000

Accrued interest payable 350,000
Interest expense 45,472
Discount on bonds payable
(77,952 x 7/12) 45,472
P6,000,000 to yield 12%.

. The entity follows