Question

Arroyo Company issued $600,000, 10-year, 6% bonds at 103.

Instructions

(a)  

Prepare the journal entry to record the sale of these bonds on January 1, 2017.

(b)  

Suppose the remaining Premium on Bonds Payable was $10,800 on December 31, 2020. Show the balance sheet presentation on this date.

(c)  

Explain why the bonds sold at a price above the face amount.

Answer 1

Solution:

Bonds are issued at 103. It means bonds are issued at 103% of face value.

Face value of the bonds = $600,000

Issue Price of the bonds = Face Value 600,000 x 103% = $618,000

(a)  Journal entry to record the sale of these bonds on January 1, 2017.

General Journal	Debit	Credit
Cash (Issue Proceeds)	$618,000
Bonds Payable (Face Value)		$600,000
Premium on Bonds Payable (bal. fig)		$18,000

b) Suppose the remaining Premium on Bonds Payable was $10,800 on December 31, 2020. Show the balance sheet presentation on this date.

Balance Sheet (partial)
Long Term Borrowings:
Bonds Payable (face Value)	$600,000
Add: Premium on Bonds Payable	$10,800
Carrying Value of Bonds Payable		$610,800

c) Why the bonds sold at price above the face amount ?

A bond will trade at a premium when it offers a coupon i.e. interest rate higher than the current prevailing market interest rates being offered for new bonds.

Since, investor wants higher return, which such a bond gives them, and that is the reason investors are willing to pay more for it.

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