Question

For the following bond prepare a journal entries for seller and buyer of the bond sod on January 1st interest payments (using the interest method). Prepare the journal entry for the retirement of the bonds with market rate unchanged at 10% for three different retirement dates: end of three years, six years, and nine years.

$1,000,000 ten year bonds, stated 9%, market 10%, interest paid annually.

Answer 1

	A	Face Value of bond	$1,000,000
	B=A*0.09	Annual coupon payment	$90,000
		Number of years	10
		Market interest	10%
		PV of cash flows	$938,554	(Using PV function with Rate=10%, Nper=10, Pmt=-90000, FV=1000000)
		Issue Price of Bond	$938,554
		Discount of Bond payable	$61,446	(1000000-938554)
		JOURNAL ENTRY FOR SELLER
	Date	Account Title	Debit	Credit
	.January 1	Bond Interest expense	$96,145
		Discount of bond payable		$6,145	(61446/10)=		$6,145
		Cash		$90,000
		JOURNAL ENTRY FOR BUYER
	Date	Account Title	Debit	Credit
	.January 1	Cash	$90,000
		Investment in Bonds	$6,145
		Bond Interest Income		$96,145
		JOURNAL ENTRY FOR RETIREMENT OF BOND-END OF THREE YEARS
		Balance in discount of Bonds payable account(end of 3 years)	$43,012	(61446-(3*6145)
		JOURNAL ENTRY FOR RETIREMENT -END OF 3 YEARS
	Date	Account Title	Debit	Credit
	.January1	Bonds payable	$100,000
		Loss on retirement of Bonds	$43,012
		Cash		$100,000
		Discount of Bonds payable		$43,012
		JOURNAL ENTRY FOR RETIREMENT -END OF 6 YEARS
	Date	Account Title	Debit	Credit
	.January1	Bonds payable	$100,000
		Loss on retirement of Bonds	$24,578
		Cash		$100,000
		Discount of Bonds payable		$24,578	(61446-6*(6145)
		JOURNAL ENTRY FOR RETIREMENT -END OF 9 YEARS
	Date	Account Title	Debit	Credit
	.January1	Bonds payable	$100,000
		Loss on retirement of Bonds	$6,145
		Cash		$100,000
		Discount of Bonds payable		$6,145	(61446-9*(6145)