Question

May 1, 2017 Sold $300,000 10-year 10% bond at a yield of 8%. Interest is paid semiannually on January 1 and July 1. Make necessary entries for the sale of the bond as well as the interest payments for the years 2017 through 2019. Use effective interest method of amortization.

Answer 1

Calculation of selling price of the bond
Selling price of the bond = Present value of all future interest payments discounted at yield % + Present value of maturity amount of bond discounted at yield %
Using present value of annuity formula , we can calculate the present value of all future interest payments
Present value of annuity = P * {[1 - (1+r)^-n]/r}
P = Semi annual interest payment = [$300000 * 10%]/2 = $15000
r = yield % per semi annual period = 8%/2 = 4%
n = no.of semi annual periods = 10 years * 2= 20
Present value of annuity = 15000 * {[1 - (1+0.04)^-20]/0.04}
Present value of annuity = 15000 * 13.59033
Present value of annuity = 203,854.90
Present value of all future interest payments = $203,854.90
Present value of bond maturity amount = Bond par value * Discount factor @ 4% at the end of 20th semi annual period
Present value of maturity amount = $300000 * [1/1.04^20] = $1,36,916.08
Selling price of bond = $203854.90 + $136916.08 = $3,40,770.98
Journal entries
Date	Account titles	Debit	Credit
May.1,2017	Cash	$340,771
	Bond Payable		$300,000
	Premium on Bond payable		$40,771
July.1,2017	Interest Expense	$4,543.61
	Premium on Bond payable	$456.39
	Cash		$5,000.00
31st Dec.2017	Interest Expense	$13,612.58
	Premium on Bond payable	$1,387.42
	Interest Payable		$15,000.00
Jan.1,2018	Interest Payable	$15,000.00
	Cash		$15,000.00
July.1,2018	Interest Expense	$13,557.09
	Premium on Bond payable	$1,442.91
	Interest Payable		$15,000.00
31st Dec.2018	Interest Expense	$13,499.37
	Premium on Bond payable	$1,500.63
	Interest Payable		$15,000.00
Jan.1,2019	Interest Payable	$15,000.00
	Cash		$15,000.00
July.1,2019	Interest Expense	$13,439.35
	Premium on Bond payable	$1,560.65
	Interest Payable		$15,000.00
31st Dec.2019	Interest Expense	$13,376.92
	Premium on Bond payable	$1,623.08
	Interest Payable		$15,000.00