Question

Company A issues a bond with a $100,000 face value. The bond matures in three years. The stated interest rate is 9% and the market interest rate is 12%. Interest payments are made every 6 months.

Record the journal entry for the issuance of the bond.

Answer 1

The selling price of bond is calculated as follows:

Given That:

Principal Amount = $100,000

Interest rate = 9% = 4.5% (Semi - Annually)

Market Rate = 12% = 6%( Semi - Annually)

Period = 3 years = 6 (Period)

a)Present Value of Principal Amount =

= $100,000*PV( 6%, 6(Period))

= $100,000*0.70496

= $70,496

b)Present Value for interest payment =

Interest = $100,000*4.5%(Semi - Annual)

= $4,500

Present value of interest =

=$4,500* PVIFA(6%, 6 (Period)

=$4,500*4.9173

=$22,128

Total Issue price of Bond = Present Value for interest payment + Present Value for interest payment

= $70,496 + $22,128

= $92,624

Discount issue of bond = Face value of Bond - Issue price of Bond

= $100,000 - $92,624

= $7,376

Journal entry is as follows:

Account and Explanation	Debit($)	Credit($)
Cash	92,624
Discount on issue of Bond	7,376
Bond Payable		100,000
(Recorded the issuance of bond at discount)