Question

Please explain all the steps of the solution thoroughly.

Bond contract rate = 7% semi-annual

Bond par                 = $10,000

Bond market rate   = 6% semi-annual

Bond life                   = 10 years

1. Find the selling price of this bond
2. Will it be sold at a discount or premium?
3. Do the journal entry for the issuance
4. Calculate the discount/premium amortization per period (use the straight-line method)
5. Do the entry for the payment of cash interest per period
6. Do the entry for the amortization of the discount/premium per period    
7. Find total interest expense per period
8. Show the balance sheet presentation of the bond after two periods have elapsed

Answer 1

1. Selling price of the bond:

Cash interest = $10,000 x 3.5% = $350

Present value of interest payments	$5,207
[$350 x 14.8775 Present value annuity factor at 3% for 20 periods]
Present value of the face value	$5,537
[$10,000 x 0.5537 Present value factor at 3% for 20 periods]
Selling price	$10,744

2. Issued at premium because selling price ($10,744) is more than the face value ($10,000)

3. Entry for issuance:

Account title and explanation	Debit	Credit
Cash	$10,744
Bonds payable		$10,000
Premium on bonds payable		$744
[To record issuance of bonds]

4. Premium amortized per period:

Total premium	$744
÷ Total number of periods [10 years x 2]	20
= Premium amortized per period	$37

5. Entry for payment of cash interest:

Account title and explanation	Debit	Credit
Interest expense	$350
Cash		$350
[To record payment of interest]

6. Entry for amortization of premium per period:

Account title and explanation	Debit	Credit
Premium on bonds payable	$37
Interest expense		$37
[To record amortization premium]

7. Total interest expense:

Total cash interest [$350 x 20]	$7,000
(Less): Total premium	($744)
Total interest expense	$6,256

8. Balance sheet after two periods:

Bonds payable
Liabilities
Bonds payable	$10,000
(Less): Premium on bonds payable [744-37-37]	$670
	$10,670