Question

Three-year bond with an 8% coupon rate sold to yield 10% on January 1, 2017.  Interest payable annually on December 31. Callable at 105.  Face value: $100,000. Bond issue costs: $5,000.

Required:
1. Calculation of premium or discount.

2. Recording of bond issuance.

3. Accounting entries.

Answer 1

1)

Present value of principal	75,132
(1,00,000 * 0.75132)
Present value of interest	19,895
(8,000 * 2.48685)
Selling price of bond	95,027

Discount = 100,000 - 95,027 = 4,973

2)

	Debit	Credit
Cash	90,027
Bond issue costs	5,000
Discount on bonds	4,973
Bonds payable		100,000

　

3)

		Debit	Credit
12/31/17	Interest Expense	9,503
	Discount on Bonds		1,503
	Cash		8,000
	Bond Issue Expense	1,667
	Bond Issue Cost		1,667
12/31/18	Interest Expense	9,653
	Discount on Bonds		1,653
	Cash		8,000
	Bond Issue Expense	1,667
	Bond Issue Cost		1,667
12/31/19	Interest Expense	9,817
	Discount on Bonds		1,817
	Cash		8,000
	Bond Issue Expense	1,666
	Bond Issue Cost		1,666
	Bonds Payable	100,000
	Cash		100,000

Working:

	Interest (8%)	Interest (10%)	Discount Amortization	Bond discount	Bond's FV	Carry value
01/01/2017				4,973	100,000	95,027
12/31/17	8,000	9,503	1,503	3,470	100,000	96,530
12/31/18	8,000	9,653	1,653	1,817	100,000	98,183
12/31/19	8,000	9,817	1,817	0	100,000	100,000