Question

On January 1, 2015, Rex Co. issued 10-year bonds with a face value of $5,000,000 and a stated interest rate of 12%, payable semiannually on June 30 and December 31. The bonds were sold to yield 10%.

1. Calculate the issue price of the bond in dollars
2. Calculate the issue price of the bonds as a percentage
3. Make the journal entry to record the issuance of the bond on January 1, 2015

Answer 1

Semi annual interest payment = Par value of bonds x Stated interest rate x 6/12

= 5,000,000 x 12% x 6/12

= $300,000

Market interest rate = 10%

Semi annual Market interest rate = 5%

Maturity period of bonds = 10 years or 20 semi annual periods

Present value of principal to be received at the maturity = Par value of bonds x Present value factor (r%, n)

= 5,000,000 x Present value factor (5%, 20)

= 5,000,000 x 0.37689

= $1,884,450

Present value of interest to be paid periodically over the term of the bonds = Interest x Present value annuity factor (r%, n)

= 300,000 x Present value annuity factor (5%, 20)

= 300,000 x 12.46221

= $3,738,663

Issue price of bond = Present value of principal to be paid at the maturity + Present value of interest to be paid periodically over the term of the bonds

= 1,884,450+3,738,663
= $5,623,113

Issue price as a percentage of par value = Issue price/ Par value

= 5,623,113/5000,000

= 112.46%

Premium on issue of bonds = Issue price of bonds- Par value of bonds

= 5,623,113-5,000,000

= $623,113

Date	General Journal	Debit	Credit
January 1, 2015	Cash	$5.623,113
	Premium on issue of bonds		$623,113
	Bonds payable		$5,000,000
	( To record issuance of bond)