Question

On January 1 2016, Natually Good Products issued $900,000 par value, 7%, five year bonds. Interest is payable semiannually at the end of the period. The market rate of interest on the date of the bond issue was 6%. The company's fiscal year ends on dec 31.

a) Determine issue price of debt.

b) Prepare Journal entry Record issuance of bonds payable. Record first semiannual interest payment. Record payment of the bonds at maturity.

Now, Prepare the journal entry to record the early retirement of the bonds at the end of the third year 2018 for 959,000

Answer 1

Solution a:

Issue price of bond = Present value of interest and principal discounted at 6%

= ($900,000*7%*6/12) * cumulative PV factor at 3% for 10 periods + $900,000*PV factor at 3% for 10th period

= $31,500 * 8.530203 + $900,000 * 0.744094 = $938,386

Hence issue price of bond is $938,386

Solution b:

Let us assume that company is using effective interest method for premium amortization.

Amortization of Premium using effective interest method
Period	Cash Paid	Interest Amount	Premium Amortization	Carrying Value
1-Jan-16	$0	$0	$0	$938,386
30-Jun-16	$31,500	$28,152	$3,348	$935,038
31-Dec-16	$31,500	$28,051	$3,449	$931,589
30-Jun-17	$31,500	$27,948	$3,552	$928,036
31-Dec-17	$31,500	$27,841	$3,659	$924,377
30-Jun-18	$31,500	$27,731	$3,769	$920,609
31-Dec-18	$31,500	$27,618	$3,882	$916,727
30-Jun-19	$31,500	$27,502	$3,998	$912,729
31-Dec-19	$31,500	$27,382	$4,118	$908,611
30-Jun-20	$31,500	$27,258	$4,242	$904,369
31-Dec-20	$31,500	$27,131	$4,369	$900,000

Journal Entries - Natually Good Products
Date	Particulars	Debit	Credit
1-Jan-16	Cash A/c Dr	$938,386.00
	To bonds payable		$900,000.00
	To Preimum on bonds		$38,386.00
	(Being bond issued at premium)
30-Jun-16	Interest Expense Dr	$28,152.00
	Premium on bond Dr	$3,348.00
	To Cash		$31,500.00
	(Being first semiannual interest payment made and premium amortized)
31-Dec-20	Bond Payable Dr	$900,000.00
	To Cash		$900,000.00
	(Being bonds matured and payment made)

it is assumed that early retirement of bond at the end of 3rd year for $959,000 is including interest for 6th semi annual period.

Journal Entries - Natually Good Products - Early retirement of bonds
Date	Particulars	Debit	Credit
31-Dec-18	Interest Expense Dr	$27,618.00
	Premium on bond Dr	$20,609.00
	Bonds Payable Dr	$900,000.00
	Loss on redemption of bond Dr	$10,773.00
	To Cash		$959,000.00
	(Being early retirement of bonds recorded)