prepare journal entries 1-4 and answer wuestions 1-4

Practice Quiz Bonds Payable On January 1, 2018, Thomas Company issued $100,000, 5-year, 12% bonds, with interest payable semi-annually, at an effective (market rate) of 10%. Use the present value factors from Exhibit 5 and 7 on pages 559 and 560, respectively from the textbook to calculate the price of the bonds at issuance. I Prepare the journal entries to record the following: 1. 1/1/2018 issuance of the bonds for cash 2. 6/30/2018 semi-annual interest payment assuming straight line amortization 3. 12/31/2018 semi-annual interest payment assuming straight line amortization 4. 1/1/2019 redemption of the bonds at a price of 115. Please answer the following questions: 1. What was the total interest expense for the year 2018 reflected on the income statement? 2. What was the total amount borrowed? 3. Calculate the effective rate of interest for the year (Interest Expense/Total Amount Borrowed) and round to the nearest percent. Is this rate more indicative of the market rate or contract rate? Do you think the financial statements reflect the true cost of borrowing? Why? 4. Why would the company redeem the bonds prior to the maturity date if they were going to recognize a loss? Can you think of an example of such a decision we might face in our personal lives? Exhibit 5 Present Value of $1 at Com- pound Interest 6% 5% 0.95238 40 30 0.90703 0.94787 0.89845 0.85161 0.94340 0.89000 0.83962 20 0.86384 50 0.82270 0.80722 0.79209 50 0.78353 0.76513 0.74726 20 0.74622 30 0.71068 10 0.67684 0.72525 0.68744 0.65160 0.61763 0.58543 0.70496 0.66506 0.62741 0.59190 0.55839 20 0.64461 30 0.61391 In Exhibit 5, the Periods column represents the number of compounding periods, and the percentage columns represent the compound interest rate per period. Thus, the present value factor from Exhibit 5 for 12% for five years is 0.56743. If the interest is compounded semian- nually, the interest rate is 6% (12% + 2), and the number of periods is 10 (5 years x 2 times per year). Thus, the present value factor from Ex- hibit 5 for 6% and 10 periods is 0.55839. Some additional examples using Exhibit 5 follow: Less than a minute: 64 pages left Tenant Some additional examples using Exhibit 5 follow: Present Value of : Interest Number of Factor Rate Periods from Ex hibits 10% 2 0.82645 10% for two years com- pounded an- nually 10% for two years com- pounded semiannual- 5% 0.82270 10% for three years com- pounded semiannual- ly 5% 6 0.74622 12% for five years com- pounded semiannual- ly 6% 10 055839 Present Value of an Annuity A series of equal cash receipts spaced equal- ly in time is called an annuity. The present value of an annuity is the sum of the present values of each cash receipt. To illustrate, as- sume that $100 is to be received annually for Less than a minute 63 pages left 10%. Using Exmore presene value of the Exhibit 7 Present Value of an Annuity of $1 at Compound Interest Periods 1 0. 0.96154 1.88609 1. 3 2.77509 2. 4 3.62990 3 0.95694 1.87267 2.74896 358753 438998 5-15787 5.89270 6.59589 5 4-45182 4 6 2 7 5.24214 6.00205 6.73274 5: 8 6. 9 7.43533 7.26879 7 10 8.11090 7.91272 7 To illustrate, the present value of $100 to be received at the end of each of the next two years at 10% compound interest per period is $173.55 ($100 x 1.73554). This amount is the same amount computed previously using the present value of $1. Pricing Bonds The selling price of a bond is the sum of the present values of: Less than a minute 121 pages left