Question

3a. On January 1 of Year 1, Congo Express Airways issued $4,800,000 of 7%, bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $4,404,000 and the market rate of interest for similar bonds is 8%. The bond premium or discount is being amortized using the straight-line method at a rate of $11,000 every 6 months. The life of these bonds is:  

b. On January 1, a company issues bonds dated January 1 with a par value of $340,000. The bonds mature in 5 years. The contract rate is 11%, and interest is paid semiannually on June 30 and December 31. The market rate is 12% and the bonds are sold for $327,490. The journal entry to record the issuance of the bond is:

c. On January 1, a company issues bonds dated January 1 with a par value of $200,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 6% and the bonds are sold for $208,531. The journal entry to record the first interest payment using straight-line amortization is: (Rounded to the nearest dollar.)

Answer 1

3a)

As per the question, Par Value=$4,800,000

Issue price=$4,404,000

Since issue price is less than par value the bond was issued at a discount.

Amount of discount=4800000-4404000=$396,000

We know that $11,000 are written off every six months thus, $22,000 are written off every year

thus, life of bonds=396000/22000=18 Years

b)

Date	Particulars	Dr($)	Cr($)
1 Jan	Cash a/c	327,490
	Discount on bonds payable a/c	12,510
	To Bonds Payabale a/c		340,000
	(Being bonds issued at discount)

c)

30 Jun	Interest Expense a/c	6,146.90
	Premium on issue of bonds a/c	853.10
	To interest on bonds payable a/c		7,000
	(Being interst on bonds payable and discount amortised)

premium to be amortised=(issue price-par value)/no. of interest periods=208531-200000/10=853.10

Interest expense=(par value*bond Rate)-premium to be amortised=(200000*7%/2)-853.10=6,146.90

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