Question

Problem # 1. On January 31 2013, Louis Company issued bonds.

Bonds data:

Maturity (par value): $400,000.

Bond term: 3-years.

Stated interest rate: 8% annually

Market interest rate: 10% annually

Interest is paid semiannually on July 31th and December 31st of each year.

Required: Calculate the bond selling price

1) Bond selling price = _____________________________

2) Prepare journal entry on January 31, 2013

3) Is this a bond with premium or discount? Explain why.

Answer 1

Answer 1

Present Value of bond
Period	Payment	Discounting Factor @ 5%	Present Value
1	16000	0.952381	15238.10
2	16000	0.907029	14512.47
3	16000	0.863838	13821.40
4	16000	0.822702	13163.24
5	16000	0.783526	12536.42
6	416000	0.746215	310425.61
Present value of Bond			$        379,697

Basic details
Coupon rate per Period (8%/2)	4%
Face value of bond	400,000
Market or Discounting rate per Period (10%/2)	5%
Interest paid (400000*4%)	16000
Payment at end of period with Face value(400000+16000)	416,000
Interest paid on	Semi-annually
Number of payment (3 years * 2 in a year)	6

Answer 2

Journal entries
Date	General Journal	Debit	Credit
January 31, 2013	Cash	379697
	Discount on Bond payable	20303
	Bond payable		400000
	(To record issued of bond payable at Discount.)

Present value of Bond			$        379,697
Less: face value of Bond			$        400,000
Discount on Bond payable			$          20,303

Answer 3

Is this a bond with a premium or discount? Explain why.			Discount
Bond issued at discount. Because of Market interest rate is higher than the Stated interest rate.