Problem 1: Bonds (10 points)
Hint: You will need to use time value of money tables to complete this problem. The present value of $1 and Present Value of an Annuity tables are presented on the previous two tabs. To ensure accuracy, round the time value of money factors to 2 decimal places only. For example, if the factor is 2.57709699, round it to 2.58.
On January 2, 20X1, the Premuroso Company, Inc., a privately held company, issued $1,000,000, 5-year, 10% term bonds, dated January 2, 20X1. The bonds provided for semiannual interest payments to be made on June 30 and December 31 of each year. Terms of the bond indenture allowed the company to call the bonds at 102 after 1 year. The bonds were issued when the market interest rate was 8%.
Premuroso, Inc. uses the effective interest method for amortizing bond discounts and premiums.
Premuroso's fiscal year end for financial reporting purposes is December 31.
The company called the bonds at 102 on June 30, 20X2.
Calculate the present values of the principal and interest cash flows related to the bonds and the resulting bond issue price. In the Compounding period(s), Interest rate, Payment amount, and Present value columns, select from the option list provided the appropriate value. Each choice may be used once, more than once, or not at all. In the Factor column, find the appropriate time value factors in the references in the exhibits and enter those values in the appropriate cell. Then, use the spreadsheet to calculate the bond issue price in the Present value column based on your entries.
Summary of Facts:
Face of Bonds	$1,000,000
Stated Rate of Interest	10%	per year
Market Rate of Interest	8%	per year
Term of Bonds	5	years
Part A) Compute the price of the bonds using formulas embedded into the cells of the table below.
	# of Compounding Periods	Effective Interest Rate per Period (%)	Payment Amount	Which TVM Table? (Select from Dropdown box)	Time Value of Money Factor (Round to 2 decimal places)	Present Value
Face of the Bonds
Periodic Interest Payments
					Price of the Bonds =
Part B) Prepare the journal entry for the issuance of the bonds.
Bonds issuance:
	Accounts		Debits	Credits
1/2/20X1
Part C) Prepare a bond amortization table using the effective interest method.
Effective Interest Method of Amortizing the Bond Premium
Date	Interest Payment	Interest Expense	Amortization of Bond Premium	Bond Premium	Bonds Payable	Book Value
January 2, 20X1
6/30/X1
12/31/X1
6/30/X2
12/31/X2
6/30/X3
12/30X3
6/30/X4
12/31/X4
6/30/X5
12/31/X5
1/1/X6
Part D) Prepare the June 30, 20X4 journal entry by referencing cells in the amortization table you created in #2 above.
	Account		Debits	Credits
Part E) In your own words, describe why the FASB prefers the effective interest method of amortizing the bond premium. Provide the FASB Codification number that supports your opinion.