Question

X Company issued at par 4-year term bonds with a par value of $100,000, dated January 1, 2020, and bearing interest at an annual rate of 6 percent payable annually on December 31. At the time of issue, the market rate for such bonds is 9 percent. X amortizes the discount or premium using effective interest rate method.

Required:

1- Compute the selling price of bond.

2- Record the journal entry.

3- Prepare schedual of amortization.

4- Record the adjusting entries for all years.

5- Record the jornal entry of paying the principle at the end of period.

Answer 1

Amounts are in $

1) Selling Price Computation

Price = [Coupon x PVIFA(9%,4)] + [Par value x PVIF(9%,4)]

= [100,000 x 6% x 3.2397] + [100,000 x 0.70843]

= 19,438 + 70,843

= 90,281

2) Journal entry at the time of issue

Cash $90,281

Discount on bonds $9,719

Bonds Payable $100,000

3) Schedule of amortization

In the amortization tabke, Interest is calculated using Effective Interest Rate (EIR) method.

Interest will be Net Carrying amount of bond multiplied by the market rate

4) Adjusting entries

Taking the calendar year as accounting year. So no interest accrual entries are accounted at year end and interest expense is accounted at the time of payment.

All the below entries are accounted on 31st December of respective year

For first year

Interest Expense $8,125

Cash $6,000

Discount on bonds $2,125

For Second year

Interest Expense $8,316

Cash $6,000

Discount on bonds $2,316

For Third year

Interest Expense $8,525

Cash $6,000

Discount on bonfs $2,525

For Fourth year

Interest Expense $8,753

Cash $6,000

Discount on bonds $2,753

5) Entry for repayment of the Principal amount

Bonds Payable $100,000

Cash $100,000

Note :

PVIFA = Present Value Interest Factor Annuity

PVIF = Present Value Interest Factor

These values are computed using calculator, we can also get these values using present value tables available online

There may be $1 difference in Interest expense due to rounding off