Question

J-BOND CO issued 700,000 of 8 year bonds at a stated rate of 4% when the market rate of interest was 5%. The bonds were issued on July 1 and paid interest semi-annually.  

The issue price of the bonds is
The bonds were issued at (premium, discount, par)
The entry to record interest expense for period 7 is ( you may use clear abbreviations for the account names)
If the company were to repurchase the bonds at 97 at the end of the 10th period, the journal entry would be
The entry to retire the bonds at maturity is

Answer 1

Solution:

1. Issue price of Bond

Face Value of Bond = 700000

Interest Rate 4%, 2% semi Annual

Market Rate of Interest = 5%, 2.5% semi annual

Period = 8years, 16 half year period

Issue Price of The Bond = Present value of Interest Expenses + Present Value of Maturity Value

= 14000 * (cumulative PV factor at 2.5% for 16 periods) + 700000 * (PV factor at 2.5% at 16th period)

= 14000*13.055003 + 700000*0.673625 = 654307.49

2. Bonds were issued at premium, discount or par?:

The bonds were issued at a discount as the market rate of Interest is higher than Coupon rate of Bond.

3. The entry to record interest expenses for period 7:

Particulars	Debit	Credit
Interest Expense Dr	16734.19
To Cash A/c		14000.00
To Discount on issue of Bond		2734.19

The amount of interest and discount amortized is shown in below table:

Bond Discount Amortization Schedule
Period	Cash Paid	Interest Expense	Discount Amortized	Carrying Value
0				654307.49
1	14000.00	16357.69	2357.69	656665.18
2	14000.00	16416.63	2416.63	659081.81
3	14000.00	16477.05	2477.05	661558.85
4	14000.00	16538.97	2538.97	664097.82
5	14000.00	16602.45	2602.45	666700.27
6	14000.00	16667.51	2667.51	669367.78
7	14000.00	16734.19	2734.19	672101.97
8	14000.00	16802.55	2802.55	674904.52
9	14000.00	16872.61	2872.61	677777.13
10	14000.00	16944.43	2944.43	680721.56
11	14000.00	17018.04	3018.04	683739.60
12	14000.00	17093.49	3093.49	686833.09
13	14000.00	17170.83	3170.83	690003.92
14	14000.00	17250.10	3250.10	693254.01
15	14000.00	17331.35	3331.35	696585.36
16	14000.00	17414.63	3414.63	700000.00

4. If the Company to repurchase the bonds at 97 at the end of 10th period:

Particulars	Debit	Credit
Bonds Payable Dr	700000.00
To Profit on redemption of Bonds		1721.56
To Discount on issue of Bond (700000-680721.56)		19278.44
To Cash A/c (700000*97%)		679000.00
(Discount on issue of bond is calculated as difference between face value of bond and carrying vlue of bond at 10th period)

5. The entry to retire the Bond at Maturity:

Particulars	Debit	Credit
Bonds Payable Dr	700000.00
To Cash A/c		700000.00