Question

On December 31, 2015, Jenna Corp issued $1,000,000, 8%, 5-year bonds. Interest is payable semi-annually on June 30 and December 31. The corporation uses the effective interest method of amortizing bond premium or discount.

Required

a. Using the present value tables, estimate the issue price of the bonds under the following three assumptions:

i. Market Rate is 8%

ii. Market Rate is 6%

iii. Market Rate is 10%

b. Prepare the journal entries for each of the assumptions

Answer 1

Solution ai:

Computation of bond price
Table values are based on:
n=	10
i=	4.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.67556	$1,000,000.00	$675,564
Interest (Annuity)	8.11090	$40,000.00	$324,436
Price of bonds			$1,000,000

Solution aii:

Computation of bond price
Table values are based on:
n=	10
i=	3.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.74409	$1,000,000.00	$744,090
Interest (Annuity)	8.53020	$40,000.00	$341,208
Price of bonds			$1,085,298

Solution a iii:

Computation of bond price
Table values are based on:
n=	10
i=	5.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.6139	$1,000,000.00	$613,910
Interest (Annuity)	7.7217	$40,000.00	$308,869
Price of bonds			$922,779

Solution b:

Journal Entries - Jenna Corp.
Event	Particulars	Debit	Credit
31-Dec-15	Cash Dr	$1,000,000.00
	To Bond Payable		$1,000,000.00
	(To record issue of bond at par)

Journal Entries - Jenna Corp.
Date	Particulars	Debit	Credit
31-Dec-15	Cash Dr	$1,085,298.00
	To Bond Payable		$1,000,000.00
	To Premium on Bond Payable		$85,298.00
	(To record issue of bond at premium)

Journal Entries - Jenna Corp.
Event	Particulars	Debit	Credit
31-Dec-15	Cash Dr	$922,779.00
	Discount on issue of bond Dr	$77,221.00
	To Bond Payable		$1,000,000.00
	(To record issue of bond at discount)