Question

Jaguar Corporation issues term bonds with a face value of $300,000 on January 1, Year One. The bonds have a stated rate of interest of 7 percent per year and a life of four years. They pay this interest annually on December 31. Because the market rate of interest at that time was 9 percent, the bonds were issued at a discount to create an effective annual rate of 9 percent. The present value of $1 in 4 periods at an annual interest rate of 9 percent is $0.70843. The present value of an ordinary annuity of $1 for 4 periods at an annual interest rate of 9 percent is $3.23972. a. What amount will Jaguar receive when the bonds are issued? b. What journal entry does the company make on January 1, Year One, when the bonds are issued? c. What journal entry or entries does the company make on December 31, Year One? d. What is the liability balance reported on the December 31, Year One, balance sheet? e. What journal entry or entries does the company make on December 31, Year Two? f. What is the liability balance reported on the December 31, Year Two, balance sheet?

Answer 1

Bonds face Value = $300,000

Stated Interest Rate = 7%

Market interest Rate = 9%

Amount to be paid per annum as per stated interest rate = $300,000 x 7%

..........................................................................................= $21,000

a. What amount will Jaguar receive when the bonds are issued?

Amount to be received by the Jaguar for bonds issue = [Annual cash interest x PVAF(9%, 4)] + [Bonds face value x PVIF(9%, 4)]

......................................................................................= ($21,000 x 3.23972) + ($300,000 x 0.70843)

......................................................................................= $68,034 + $212,529

......................................................................................= $280,563

b. What journal entry does the company make on January 1, Year One, when the bonds are issued?

Date	Account Title and Explanation	Debit	Credit
Year 1
1-Jan	Cash	$280,563
	Discount on Bonds Payable	$19,437
	Bonds Payable		$300,000
	(To record issue of bonds payable)

c. What journal entry or entries does the company make on December 31, Year One?

Date	Account Title and Explanation	Debit	Credit
Year 1
31-Dec	Interest Expense ($280,563 x 9%)	$25,251.00
	Discount on Bonds Payable ($25,251 - $21,000)		$4,251.00
	Cash		$21,000.00
	(To record the payment of interest)

d. What is the liability balance reported on the December 31, Year One, balance sheet?

Liability Balance to be reported = $300,000 - ($19,437 - $4,251)

..................................................= $300,000 - $15,186

..................................................= $284,814

e. What journal entry or entries does the company make on December 31, Year Two?

Date	Account Title and Explanation	Debit	Credit
Year 1
31-Dec	Interest Expense ($284,814 x 9%)	$25,633.00
	Discount on Bonds Payable ($25,633 - $21,000)		$4,633.00
	Cash		$21,000.00
	(To record the payment of interest)

f. What is the liability balance reported on the December 31, Year Two, balance sheet?

Liability Balance to be reported = $300,000 - ($19,437 - $4,251 - $4,633)

..................................................= $300,000 - $10,553

..................................................= $289,447