Question

  On March 1, 2018, Greenway Corporation issued 5% bonds dated January 1, 2018 with a par value of $1,000,000. The bonds were sold for the present value of the bonds on March 1, 2018 plus two-month accrued interest. The bonds mature on December 31, 2023. Interest is paid semiannually on Jun 30 and December 31. Greenway's fiscal year ends on December 31 each year. The effective interest rate is 7%.

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​Required:

a. Determine the present value the bonds on March 1, 2018 and the amount of accrued interest that was included in the proceeds received from the bond sale. Show calculations.

​b. Prepare the journal entry for the issuance of the bonds on March 1, 2018.

c. Prepare the journal entry for the interest payment on June 30, 2018.

Answer 1

Price of bonds:
n =12
I = 3.5%
Cashflows				Amount	PVF	Present value
Semi annual interest (1000000*5%*6/12)				25000	9.66333	241583.3
Principal				1000000	0.661783	661783
PRICE OF BONDS						903366
Accrued interest on Mar 01 = 1000000*5%*2/12 = 8333
Total Proceeds from issuance of bonds = 903366+8333 = 911699
Journal entries:
Date	Accounts title and explanation			Debit $	Credit $
1-Mar	Cash account			911699
	Discount on bonds payable (1000000-903366)			96634
	Bonds Payable				1000000
	Interest payable				8333
30-Jun	Interest expenses (903366*3.5%)			31618
	Interest payable			8333
	Cash account				25000
	Discount on bonds payable0				14951