Question

A company issues a $10,000 bond with an interest rate of 4% per year. Interest is paid once per year, and it will mature in 5 years. Investors expect bonds of similar risk and maturity to pay interest of 7%: Show work

a.

Calculate the selling price of the bond. Round to two decimal places.

b. Record the journal entry that the company would record when this bond is issued

c. Record the journal entry for the first interest payment

Answer 1

(a)Calculate the selling price of the bond. Round to two decimal places.

Face Value           =$10,000

Interest per year   =$10,000 x 4% = $400 per year

Discount rate        = 7%

Maturity               = 5 Year

Selling price of the bond = $8,770

= $10,000 x (PVF,7%, 5 Years) + $400 x PVAF( 7%, 5Year)

= ($10,000 x 0.71299) + ($400 x 4.1002)

= $7,129.90 + $1,640.08

= $8,769.08

b. Record the journal entry that the company would record when this bond is issued

Cash A/c	$8769.08
Discount on Bond Payable A/c	$1230.02
To Bond Payable		$10,000

c. Record the journal entry for the first interest payment

Dr     Bond Interest Expense A/c               $4,00

Cr      Accrued Interest Payable    A/c $400

($10,000 x 4% = $400)