Question

Do the Journal entries, Ledger and Trial balance and Balance Sheet

1	Issued $100,000, 6% semi-annual, 10 year bonds. Effective rate is 7%. @92.893%
2	Paid $10,000 for bond issue costs.
3	Amortized the bond issue costs over 20 semi-annual periods
4	Recorded the first semi-annual interest payment.
5	Issued $100,000, 8% semi-annual, 10 year bonds. Effective rate is 7%. @107.106%
6	Paid 3,000 for bond issue costs.
7	Amortized the $3,000 bond issue costs over 20 periods.
8	Recorded the first semi-annual interest payment.

PLEASE PROVDE JOURNAL ENTRIES

Answer 1

Bonds issued at discount

S.no	Particulars	Debit	Credit
1	Cash	92,893
	Discount on issue of bonds	7,107
	Bonds payable		100,000
	(To record issue of bonds)
2	Bond issue cost asset	10,000
	Cash		10,000
	(To record cash paid for issue of bond)
3	Bond issue expense	500
	Bond issue cost asset		500
	(To record amortization of bond issue cost for 6 month period)
4	Interest expense	3,251
	Cash		3,000
	Discount on issue of bonds		251
	(To record interest expense for the 6 month period)

Notes -

1.Cash received at the issue of bond is only 92,893 which is lower than the face value of the bond, hence it can be said that the bonds are issued at a discount of 7,107.

2.Bond issue cost of 10,000 should be amortized over the period of the bond , amortization for the 6 month period would be 10,000 / 10 years / 2 => 500. Bond issue cost are to be recorded as assets and mortised each year.

3.Interest expense for the period would be the current value of bond (i.e 92,893) multiplied by the effective rate of interest (i.e 3.5% for 6 months) whereas the actual interest paid would be only 3,000 (i.e face value of 100,000 multiplied by the coupon rate of 3% for 6 months). The difference between the interest expense and the actual interest payment is the amortization of bond discount.

Bonds issued at premium

S.no	Particulars	Debit	Credit
5	Cash	107,106
	Premium on issue of Bonds		7,106
	Bonds payable		100,000
	(To record issue of bonds)
6	Bond issue cost asset	3,000
	Cash		3,000
	(To record cash paid for issue of bond)
7	Bond issue expense	150
	Bond issue cost asset		150
	(To record amortization of bond issue cost for 6 month period)
8	Interest expense	3,749
	Premium on issue of Bonds	251
	Cash		4,000
	(To record interest expense for the 6 month period)

Notes -

1.Cash received at the issue of bond is more than the face value of the bond, hence it can be said that the bonds are issued at a premium of 7,106.

2.Bond issue cost of 3,000 should be mortised over the period of the bond , amortization for the 6 month period would be 3,000 / 10 years / 2 => 150. Bond issue cost are to be recorded as assets and amortized each year.

3.Interest expense for the period would be the current value of bond (i.e 107,106) multiplied by the effective rate of interest (i.e 3.5% for 6 months) whereas the actual interest paid would be 4,000 (i.e face value of 100,000 multiplied by the coupon rate of 4% for 6 months). The difference between the interest expense and the actual interest payment is the amortization of bond premium.

The premium or discount on the issue of bonds is based on the difference between present value and the face value of the bonds. For this question present value is the issue price given as 92.893 % and 107.106%

Present value computation

Bond 1

Particulars	Cash flow	Periods	Discounting factor at 3.5%	Present value
Interest	3,000	20	14.2124	42,637
Redemption value	100,000	20	0.50256	50,256
Total				92,893

Bond 2

Particulars	Cash flow	Periods	Discounting factor at 3.5%	Present value
Interest	4,000	20	14.2124	56,850
Redemption value	100,000	20	0.50256	50,256
Total				107,106