Question

On October 1, ABC Company issues $1,400,000 face value 5%, 10-year bonds when the market for ABC bonds required a 6% yield. Interest is paid annually on October 1. ABC’s fiscal year ends December 31.

Required:

1. Determine the issue price of the bonds and prepare the journal entry to record the issuance.
2. Prepare all entries related to these bonds at December 31, 2019, October 1 and December 31, 2020. Use the effective interest method to amortize premium or discount, if any.
3. Assume the bonds are callable at 101 and ABC decides to redeem $700,000 of the bonds on October 1, 2021. Prepare the entry(ies) required to record the partial redemption.

Answer 1

1.

Issue price of bonds

$        12,96,959

Date	Account Title	Debit	Credit
01-Oct	Cash	$              12,96,959
	Discount on bonds payable	$                1,03,041
	Bonds Payable		$          14,00,000
	(To record issue of bonds )

Working:

Face value (FV)	$   14,00,000.00
Coupon rate	500%
Number of compounding periods per year	1
Interest per period (PMT) (1400,000 * 5%)	$        70,000.00
Number of years to maturity	10 Years
Number of compounding periods till maturity (NPER) (10 * 1)	10
Market rate of return/Required rate of return (RATE)	6%
Issue price of bonds	PV(RATE,NPER,PMT,FV)*-1
Issue price of bonds	$        12,96,959

2.

Date	Account Title	Debit	Credit
31-12-2019	Interest Expense (1296959*6%*3/12)	$                    19,454
	Discount on bonds payable		$                  1,954
	Interest Payable (70000*3/12)		$                17,500
	(To record interest expense )
01-10-2020	Interest Payable	$                    17,500
	Interest Expense (1296959+1954)*6%*9/12	$                    58,451
	Discount on bonds payable		$                  5,951
	Cash		$                70,000
	(To record interest payment )
31-12-2020	Interest Expense (1296959+1954+5951)*6%*3/12	$                    19,573
	Discount on bonds payable		$                  2,072
	Interest Payable		$                17,500
	(To record interest expense )

3.

Date	Account Title	Debit	Credit
01-10-2021	Cash	$                7,07,000
	Loss on redemption of bond	$                    41,375
	Discount on bonds		$                48,375
	Bonds Payable		$            7,00,000