Question

A company issued the following semi-annual bonds:

      Face amount:   $80,000

      Coupon rate:     8%

      Yield:                   6%

      Life:                   20 years

a. Compute the selling price of the bonds.

2. Prepare the journal entry for the issuance of the bonds using the selling price from part (a).

                                              

c. Prepare the amortization schedule for only the first two interest periods using the interest

     method.

    CASH                  INTEREST EXPENSE                   AMORTIZATION                        BOOK VALUE

d. Prepare the journal entry to record the first interest payment on the bonds using the

     schedule completed in part (c).

                           

Answer 1

Solution a:

Computation of bond price
Table values are based on:
n=	40
i=	3.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.30656	$80,000.00	$24,525
Interest (Annuity)	23.11477	$3,200.00	$73,967
Price of bonds			$98,492

Solution b:

Journal Entries
Event	Particulars	Debit	Credit
1	Cash Dr	$98,492.00
	To Bond Payable		$80,000.00
	To Premium on Bond Payable		$18,492.00
	(To record issue of bond at premium)

Solution c:

Bond Amortization Schedule (Partial)
Semiannual Period	Cash Paid	Interest Expense	Premium Amortized	Carrying Amount
Issue date				$98,492
1	$3,200	$2,955	$245	$98,247
2	$3,200	$2,947	$253	$97,994

solution d:

Journal Entries
Event	Particulars	Debit	Credit
1	Interest expense Dr	$2,955.00
	Premium on bond payable Dr	$245.00
	To Cash		$3,200.00
	(To record interest expense and premium amortization)