Question

June 30th: The company issues a 5-year bond with a face value of $100,000 and a stated annual rate of 8%. Interest is due on June 30th each year. The market rate is 6% on the date of issuance. Prepare the Journal Entry for June 1st, and the journal entry to acrrue interest at year end. The effective interest method is used to amorize bond premiums and discounts.

Answer 1

Date	Accountt title and explanation	Debit	Credit
July 1	Cash	$ 1,08,425
	Bonds Payable		$       1,00,000
	Premium on Bonds Payable		$             8,425
	(TO record issuance of Bond)
June 30	Interest Expense	$       6,505
	Premium on Bonds Payable	$       1,495
	Cash		$             8,000
	(To record payment of interest in cash)
Working:
	a. Present value of annuity of 1	=	(1-(1+i)^-n)/i			Where,
		=	(1-(1+0.06)^-5)/0.06			i	6%
		=	4.21236			n	5
	b. Present value of 1	=	(1+i)^-n
		=	(1+0.06)^-5
		=	0.747258173
	c. Present value of annual coupon	=	$       1,00,000	x	8%	x	4.21236	=	$           33,699
	d. Prersent value of Par Value	=	$       1,00,000			x	0.7472582	=	$           74,726
	Price of bond								$       1,08,425
	e. Premium amortization based on effective interest method:
Year	Interest Paid in cash	Interest Expense		Premium Amortized			Carrying Value
0							$ 1,08,425
1	$                                                                   8,000	$       6,505		$    1,495			$ 1,06,930
2	$                                                                   8,000	$       6,416		$    1,584			$ 1,05,346
3	$                                                                   8,000	$       6,321		$    1,679			$ 1,03,667
4	$                                                                   8,000	$       6,220		$    1,780			$ 1,01,887
5	$                                                                   8,000	$       6,113		$    1,887			$ 1,00,000