Question

Please answer the following question:

Discuss how the price of a bond is determined and provide an example of each of the following conditions

a.) A bond issued at premium

b.) A bond issued at par

c.) A bond issued at a discount

Provide a journal entry that would be made to record each of your bond examples as well as the first journal entry that would be made to amortize each bond's premium and discount.

Thanks!

Answer 1

The price of a bond is determined as per the below formula:

Issue price = Par value + Premium or - Discount

a) Let us assume bond of par value $100 is issued at a premium of $5. The annual coupon rate is 10% and maturity in 5 years.

    Issue price = 100 + 5 =$105

Cash                                                          105             

   Bond payable                                                 100

   Premium on Bond Payable                              5

(To record the issuance of bond)

Interest Expense                                                9                 

Premium Bond Payable (5/5)                         1          (Amortisation of premium)

     Cash    (100X10%)                                              10     

(To record the payment of interest and amortization on bond payable)

b) Let us assume a bonds of par value $100 is issued at par.

    Issue price = $100

Cash                                                          100           

   Bond payable                                                 100  

(To record the issuance of bond)

Since there is no premium or discount, there will be no entry for amortisation.

c) Let us assume bond of par value $100 is issued at a discount of $10. The annual coupon rate is 5% and maturity in 5 years.

Issue price = 100 - 10 =$90

Cash                                                       90

Discount on Bond Payable                 10

   Bond payable                                                 100

(To record the issuance of bond)

Interest Expense                                             7                                           

        Discount on Bonds Payable (10/5)              2      (Amortisation of discount)

        Cash    (100X5%)                                             5        

(To record the payment of interest and amortization on bonds payable)