Question

On January 1 of this year, Gateway Company issued bonds with a face value of $1 million and a coupon rate of 9 percent. The bonds mature in 10 years and pay interest semiannually every June 30 and December 31. When the bonds were issued, the annual market rate of interest was 8 percent. Record the issuance of the bonds on January 1 of this year

Answer 1

The journal entry is:

Dr Cash 1,067,952

Cr Bond Payable 1,000,000

Cr Premium on Bond 67,952

(to record bond issuance)

Step-by-step explanation:

As the coupon rate is higher than the annual market rate of interest, the bond is issued at premium ( company received more money from selling bond than its face value).

The price of the bond is calculated as:

+ Semiannual coupon: 1,000,000 x 9%/2 = 45,000

+ Discount rate: 9%/2 = 4.5%;

+ Discounting period = 10 years x 2 = 20 years.

=> Bond price = 45,000/4.5% x [1 - 1.045^(-20)] + 1,000,000/1.045^20 = 1,067,952

So, the cash receipt from selling the bond is $1,067,952 and is recorded as Debit; The bond payable is recorded at its face value of $1,000,000 Cr; the difference will go into Premium on Bond $Cr 67,952.