Question

1. A company issues $1,000,000 of 20-year 10% bonds that pay interest semiannually. The market rate for bonds of similar risk is 9%. Prepare the journal entries to record the issuance of the bond and the first two interest payments. : Please walk through interest journal entries

Answer 1

Ans:

Face Value : $1,000,000

Life : 20 Years

Interest Rate : 10%

Periodic : 5%

Periodic Interest : $1,000,000 * 5% = $50,000

Market Interest Periodic : 4.5%

Annuity Factor @4.5% for 40 Periods : 1/(1.045)^1 + 1/(1.045)^2 + 1/(1.045)^3 +............... 1/(1.045)^40= 18.40158

Present Value Factor @5% for 40 Periods : 0.17193

Value of Bond : Periodic Interest * Annuity Factor + face Value * Present Value factor

= $50,000*18.40158 + $1,000,000*$0.17193 = $1,092,009

Premium on issue : $1,092,009 - $1,000,000 = $92,009

So Journal entry will be:

S No.	Account title	Debit	Credit
1.	Cash	1,092,009
	10% Bonds Payable		1,000,000
	Premium on issue of bonds		92,009
2.	Interest Expense	49,140
	Premium Amortisation	860
	Cash (To report the interest expesne on $1,092,009 @4.5% and Premium amortised $860, Closing Balance in Bonds liability $1,091,149)		50,000
3	Interest Expense	49,102
	Premium Amortisation	898
	Cash (To report the interest expesne on $1,091,149 @4.5% and Premium amortised $898, Closing Balance in Bonds liability $1,090,251)		50,000

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