Question

Consider a bond issue as follows:

Face $100,000

Stated rate of interest 14%

Market rate of interest 8%

Maturity in five years

Semi-annual interest payments on June 30 and December 31

Date of issue on January 1, 2018

1. Determine the amount at which the bond was issued/sold for.

2. Prepare the journal entry for the issuance.

3. Prepare the journal entry for the first interest payment.

4. Prepare the journal entry for the second interest payment.

4. Prepare the Balance Sheet presentation at December 31, 2018.

Answer 1

Solution 1:

Face Value = $100,000

Semiannual interest payment = $100000*14%*6/12 = $7,000

Market rate = 8% or 4% semi annual

Maturity = 5 years = 10 half years

Bond issuance amount = Semiannual interest payment *Cumulative PV Factor @4% for 10 periods + Maturity Value * PV Factor @4% at 10th period

= $7000*8.110896 + $100000 *0.675564

= $124,333 (rounded off)

Solution 2:

Journal Entries
Date	Particulars	Debit	Credit
01-Jan-18	Cash Dr	$1,24,333
	To Bond Payable		$1,00,000
	To Premium on Bond Payable		$24,333
	(Being issued of bond recorded)

Solution 3:

Journal Entries
Date	Particulars	Debit	Credit
30-Jun-18	Interest Expense Dr (124333*4%)	$4,973
	Premium on bond payable Dr	$2,027
	To Cash		$7,000
	(to record first interest payment)

Solution 4:

Journal Entries
Date	Particulars	Debit	Credit
31-Dec-18	Interest Expense Dr [(124333-2027)*4%]	$4,892
	Premium on bond payable Dr	$2,108
	To Cash		$7,000
	(to record second interest payment)

Solution 5:

Balance Sheet (Partial)
December. 31, 2018
Bond Payable	$1,00,000
Add: Premium on Bond Payable ($24333-$2027-$2108)	$20,198
Net Bond Liability		$1,20,198