Question

1. ABC company issued $800,000 11, 10 year bond on December 31, 2017 when the market rate for this type of bond is 12%. Interest is payable annually on December 31.ABC uses the straight-line method to amortize bond premium or discount.

a. How much will you receive? prepare the entry to issue the bond.

b. Record the entry to show the interest expense and the bond premium or discount amortization on December 31, 2019?

c. what entry is made at the end of the 10 years to redeem (pay) the bonds at maturity after the last interest payment and amortization has been done?

2. You borrow $2000 and gave a note discounted for 5% for 5 months. The note was discounted up front. Prepare the journal entry to issue the note.

Answer 1

Solution 1a:

Computation of bond price
Table values are based on:
n=	10
i=	12%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.322	$800,000.00	$257,600
Interest (Annuity)	5.650	$88,000.00	$497,200
Price of bonds			$754,800

Journal Entries
Date	Particulars	Debit	Credit
31-Dec-17	Cash Dr	$754,800.00
	Discount on issue of bond Dr	$45,200.00
	To Bond Payable		$800,000.00
	(To record issue of bond at discount)

Solution 1b:

Journal Entries
Date	Particulars	Debit	Credit
31-Dec-19	Interest Expense Dr	$92,520.00
	To Cash		$88,000.00
	To Discount on issue of bond		$4,520.00
	(To record interest payment and discount amortization)

Solution 1c:

Journal Entries
Date	Particulars	Debit	Credit
31-Dec-17	Bond Payable Dr	$800,000.00
	To Cash		$800,000.00
	(To record bond repayment at maturity)

solution 2:

Journal Entries
Event	Particulars	Debit	Credit
1	Cash Dr	$1,900.00
	Interest expense Dr	$100.00
	To Notes Payable		$2,000.00
	(To record amount borrowed by issuing note)