Question

GoNe GeArL Inc. sold (issued) some bonds on 1.1.17.

The face value of the bonds was $1,000,000.

The bonds had a maturity date of 5 years.

The interest rate on the bonds was 5% (contract rate).

The market interest rate was 6%.

Interest is paid annually on January 1.

1. Determine the amount of proceeds for the sale (issuance) of these bonds.

2. Prepare the journal entry for the issuance of the bonds on 1.1.17.

Answer 1

1.

Annual interest payment = Par value of bonds x Stated interest rate x 6/12

= 1,000,000 x 5%

= $50,000

Market interest rate = 6%

Maturity period of bonds = 5 years

Present value of principal to be received at the maturity = Par value of bonds x Present value factor (r%, n)

= 1,000,000 x Present value factor (6%, 5)

= 1,000,000 x 0.74726

= $747,260

Present value of interest to be paid periodically over the term of the bonds = Interest x Present value annuity factor (r%, n)

= 50,000 x Present value annuity factor (6%, 5)

= 50,000 x 4.21236

= $210,618

Selling price of bond = Present value of principal to be paid at the maturity + Present value of interest to be paid periodically over the term of the bonds

= 747,260+210,618
= $957,878

The amount of proceeds for the sale (issuance) of these bonds = $957,878

2.

Par value of bonds = $1,000,000

Amount proceeds for issue of bonds = $957,878

Discount on issue of bonds = Par value of bonds- Amount proceeds for issue of bonds

= 1,000,000-957,878

= $42,122

Date	General Journal	Debit	Credit
1.1.17	Cash	$957,878
	Discount on issue of bonds	$42,122
	Bonds payable		$1,000,000
	( To record issuance of bonds at discount)