Question

On January 1, a company issues bonds with a par value of $500,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 12%. Calculate the sale price and record the journal entry for this sale. Using the straight-line method, calculate the amount of interest expense for the first semiannual interest period and record the journal entry.

Answer 1

Sale Price of the Bond

The Sale Price of the is the Present Value of the Coupon Payments plus the Present Value of the face Value

Face Value of the bond = $500,000

Semi-annual Coupon Amount = $22,500 [$500,000 x 9% x ½]

Semi-annual Yield to Maturity = 6% [12% x ½]

Maturity Period = 10 Years [5 Years x 2]

Sale Price of the Bond = Present Value of the Coupon Payments + Present Value of the face Value

= $22,500[PVIFA 6%, 10 Years] + $500,000[PVIF 6%, 10 Years]

= [$22,500 x 7.36009] + [$500,000 x 0.55839]

= $165,602 + $279,197

= $444,799

“Sale Price of the Bond = $444,799”

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)ⁿ} / r], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.  

--The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)ⁿ], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.   

Journal Entry to record the sale of Bond

Date	Accounts Tittles and explanations	Debit ($)	Credit ($)
January 1	Cash A/c	444,799
	Discount on Bond Payable A/c	55,201
	To Bond Payable A/c		500,000
	[Journal Entry to record the Issuance of Bond]

The amount of interest expense for the first semiannual interest period and record the journal entry

Amortization of Discount on Bond Payable during each semiannual period using straight line method of amortization

= Discount on Bond Payable / Number of Periods

= $55,201 / (5 Years x 2)

= $55,201 / 10

= $5,520 per each semi-annual period

Cash Payment = Face value of the bond x Coupon rate x ½

= $500,000 x 9% x ½

= $22,500

Therefore, the amount to debited to Interest Expense on June 30, 2019 = Cash Payment + Amortization of Discount on Bond Payable

= $22,500 + $5,520

= 28,020

Journal Entry to record the first interest payment and the amortization of the bond discount

Date	Accounts Tittles and explanations	Debit ($)	Credit ($)
June 30	Interest Expenses A/c	28,020
	To Discount on Bond Payable A/c		5,520
	To Cash A/c		22,500
	[Journal Entry to record the first interest payment and the amortization of the bond discount]