Question

On Jan 2, Lincoln Motors issued 1,000, $1000 bonds to finance a new showroom. The bonds are 5-year, 6% bonds that pay interest on Dec 31 each year. When issued investors required 7% interest and the bonds are due on Dec 31, year 5.

a. Compute the selling price of the bonds

b. Prepare entry to record the sale of the bonds

c. prepare amortization table for bonds

d. prepare journal entry for first annual interest payment

Answer 1

Solution a:

Computation of bond price
Table values are based on:
n=	5
i=	7%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.712986	$1,000,000.00	$712,986
Interest (Annuity)	4.100197	$60,000.00	$246,012
Price of bonds			$958,998

Solution b:

Journal Entries
Date	Particulars	Debit	Credit
2-Jan	Cash Dr	$958,998.00
	Discount on issue of bond Dr	$41,002.00
	To Bond Payable		$1,000,000.00
	(To record issue of bond at discount)

Solution c:

Bond Amortization Schedule
Date	Cash Paid	Interest Expense	Discount Amortized	Unamortized Discount	Carrying Value
Issue Date				$41,002	$958,998
Year 1	$60,000	$67,130	$7,130	$33,872	$966,128
Year 2	$60,000	$67,629	$7,629	$26,243	$973,757
Year 3	$60,000	$68,163	$8,163	$18,080	$981,920
Year 4	$60,000	$68,734	$8,734	$9,346	$990,654
Year 5	$60,000	$69,346	$9,346	$0	$1,000,000

Solution d:

Journal Entries
Date	Particulars	Debit	Credit
31-Dec	Interest Expense Dr	$67,130.00
	To Cash		$60,000.00
	To Discount on issue of bond		$7,130.00
	(To record interest payment and discount amortization)