Question

A company issues $896,000 of 5-year, 5% bonds on January 1, 2021. The bonds pay interest annually.

1) Calculate the issue price of the bonds using a market rate of 4%

2) Record the bond issue

3) Prepare an effective interest amortization table for the bonds

4) Prepare the journal entries to record the first three interest payments. Ignore any year-end accruals of interest

5) Assuming the company has an October 31 year end, prepare the adjusting entry for interest on October 31, 2021.

Answer 1

1	Price of the Bond	$935,891
	Bond Price = Present value of Bond Face Value and Interest
	n = 5
	r = 4%
	Face Value
	$896,000 x PV of $1 4%, 5
	$896,000 x 0.82193	$736,449
	Interest
	$44,800 x PVA of $1 4$, 5	$199,442
	$44,800 x 4.45183
		$935,891
2
Date	General Journal	Debit	Credit
Jan 1, 2021	Cash	$935,891
	Bonds Payable		$896,000
	Premium on Bonds Payable		$39,891
3
	Date	Interest Paid	Interest Exp.	Amortization	Carrying Value
	Jan 1, 2021				$935,891
	Dec 31, 2021	$44,800	$37,436	$7,364	$928,526
	Dec 31, 2022	$44,800	$37,141	$7,659	$920,867
	Dec 31, 2023	$44,800	$36,835	$7,965	$912,902
	Dec 31, 2024	$44,800	$36,516	$8,284	$904,618
	Dec 31, 2025	$44,800	$36,182	$8,618	$896,000
4	Interest Expense	$37,436
	Premium on Bonds Payable	$7,364
	Cash		$44,800
5	Interest Expense	$31,196
	Premium on Bonds Payable	$6,137
	Cash		$37,333