Question

1. The University of Alaska sells three-year bonds with an $800,000 face value to private investors. The bonds are due in three years, have an 8% coupon rate and interest is paid annually. The bonds were sold to yield 6%. What proceeds does UA receive from the investor Did the bond sell for par, a premium or a discount? How much was the premium or discount? If the bond sold for a premium or discount, what is the balance in the premium or discount following the interest payment at the end of year 1? Prepare all of the necessary journal entries, beginning with the issuance of the bond, the three annual interest payments and the bond retirement at the end of year 3.

Answer 1

	Coupon Rate per period	8%
	Period	3
	Effective/Market rate per period	6%
	Bond amount	$800,000
							Amortization Schedule
							Period	Cash paid	Interest	Closing bal.
		Period	Cashflows	Present value	Calculation		0	0	$0	$842,768
		1	$64,000	$60,377	(64000/(1+0.06)^1)		1	$64,000	$50,566	$829,334
		2	$64,000	$56,960	(64000/(1+0.06)^2)		2	$64,000	$49,760	$815,094
		3	$864,000	$725,431	(864000/(1+0.06)^3)		3	$864,000	$48,906	$0
				$842,768
1.	Proceeds from bonds	$842,768
	Bonds issued at PREMIUM
	Premium amount	$42,768
2.	Account titles and explanation	Debit	Credit
	Cash	$842,768
	Premium on bonds payable		$42,768
	Bonds payable		$800,000
	(bonds issued)
	Interest expense	$50,566
	Premium on bonds payable	$13,434
	Cash		$64,000
	(interest recognised for year 1)
	Interest expense	$49,760
	Premium on bonds payable	$14,240
	Cash		$64,000
	(interest recognised for year 2)
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