Question

On 1/1/2019, Newmanium, Inc. issues $40,000 in bonds having a stated rate of 7%. The bonds mature in 6 years, and interest is paid annually each 12/31. The market (effective) rate is 9%.What are the proceeds of this bond (i.e., the issuance price)?Record all necessary journal entries during the first two years of the bond’s life assuming the company uses the straight-line amortization method:

Record the necessary journal entries on 12/31/19 and 12/31/20 assuming the company uses the effective-rate amortization method:

Answer 1

Face Value = $ 40000

Stated Rate of interest = 7 %

interest Amount for annual period = 40000 * 7%

= $ 2800 per annum

market rate of interest ( i ) = 9%

no of years ( n ) = 6

proceeds from Bond issue = $ 36409

issue Price of the bond
total values based on
n =	6
I =	9%
Cash Flow	Table Value	amount	Present Value ( table Value * Amount )
par Value                        PVF ( i= 9% , n= 6)	0.59622	$40,000	23848.68
interest Annuity PVA ( i= 9% , n= 6 )	4.48592	$2,800	12560.58
proceeds from issue of Bond			36409.26

Discount on bonds = 40000 - 36409 ( rounded )

= $ 3591

Straight line Amortization = Discount / no of years

= 3591/6

= $ 598.5 per year

	Straight Line Method Amortization
Date	Accounts Name	Debit	Credit
	Bond Issue journal entry
1-Jan	Cash	36409
	Discount on bonds	3591
	Bonds Payable		40000
31-Dec	Interest Expense	3398.5
	Discount on bonds		598.5
	Cash		2800
2nd year
31-Dec	Interest Expense	3398.5
	Discount on bonds		598.5
	Cash		2800

using effective Amortization method ( rounded to nearest whole dollar )

	Effective method
Date	Accounts Name	Debit	Credit
	Bond Issue journal entry
1-Jan	Cash	36409
	Discount on bonds	3591
	Bonds Payable		40000
31-Dec	Interest Expense ( 36409*9%)	3277
	Discount on bonds		477
	Cash   ( 40000 * 7% )		2800
31/12/2020	Interest Expense   ( 36409-477)* 9%	3234
	Discount on bonds		434
	Cash		2800

Amortization = Cash paid - interest Expense