McGee Company issued $400,000 of 8%, 20-year bonds on January 1, 2014. Interest is payable...

Question:

McGee Company issued $400,000 of 8%, 20-year bonds on January 1, 2014. Interest is payable semiannually on July 1 and January 1. McGee Company uses the effective interest method of amortization for bond premium or discount.

Assume an effective yield of 6% in pricing the bond.

Instructions:

Calculate the price of the bond

Prepare the first 4 periods of amortization schedule

Prepare the journal entries to record the following. (Round to the nearest dollar)

(a) The issuance of the bonds

(b) The payment of interest and the related amortization on July 1, 2014

(c) The accrual of interest and the related amortization on December 31, 2014.

Bonds:

Bonds are financial instruments issued by companies in order to raise capital. Each bond has a stated face value which is the amount to be repaid upon maturity as well as a stated interest rate which dictates the interest to be paid to investors periodically over the life of the bond. The issuance price of a bond is determined by the bond's interest rate in comparison to the market rate of interest.

Answer and Explanation:

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Calculate the price of the bond

The price of the bond will equal the present value of the principal plus the present value of the interest payments.

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