Question

Long-Term Bonds Payable Review Problem
On January 1, 2018, Oxford, Inc. issued $400,000 of 6% bonds. The bonds mature in four years. The annual market yield for bonds of similar risk and maturity is 8%. Oxford Inc.
has a 12/31 fiscal year-end.

1. Prepare the journal entry that Oxford would make for the issuance of the bonds.

2. Prepare the journal entry required by Oxford on December 31, 2018 to record interest
and amortize the bond.

3. Prepare the journal entry required by Oxford on December 31, 2019 to record interest
and amortize the bond.

4. At what value would Oxford report the bonds payable on its December 31, 2019
balance sheet?

Answer 1

Annual cash Interest = 400000*6% = 24000
n = 4
I = 8%
Cashflows	Amount'	PVf	Present value
Annual cash Interest	24000	3.31213	79491.12
Maturity value	400000	0.73503	294012
Price of bonds			373503.1
Amort Chart
Period	Cash int	Int exp	Discount	Unamort	carrying
			Amortized	Discount	value
01.01.18				26497	373503
31.12.18	24000	29880	5880	20617	379383
31.12.19	24000	30351	6351	14266	385734
Journal entries
Date	Accounts title and explanations	Debit$	Credit $
01.01.18	Cash				373503
	Discount on bonds payable		26497
	Bonds payable				400000
	(for issuance of bonds)
31.12.18	Interest expense			29880
	Cash					24000
	Discount on bonds payable			5880
	(for interest expenses incurred)
31.12.19	Interest expense			30351
	Cash					24000
	Discount on bonds payable			6351
	(for interest expenses incurred)
Req 4.
Bonds payable reported on Dec31 2019:	385734