Answer:
the market price of the bonds = present value of face value + present value of coupons:
PV of face value = $600,000 / (1 + 4%)²⁰ = $273,832.17
PV of coupons = $21,000 x 13.590 (annuity factor 4%, n = 20) = $285,390
market price of the bonds = $559,222.17 ≈ I will round down to $559,222
The journal entry to record the issuance of the bonds:
January 1, 2020, bonds are issued
Dr Cash 559,222
Dr Discount on bonds payable 40,778
Cr Bonds payable
Assuming the effective interest method:
July 1, 2020, first coupon payment
Dr Interest expense 22,369
Cr Cash 21,000
Cr Discount on bonds payable 1,369
amortization of discount = ($559,222 x 4%) - $21,000 = $22,369 - $21,000 = $1,369
January 1, 2021, second coupon payment
Dr Interest expense 22,424
Cr Cash 21,000
Cr Discount on bonds payable 1,424
amortization of discount = ($560,591 x 4%) - $21,000 = $22,424- $21,000 = $1,424
July 1, 2021, third coupon payment
Dr Interest expense 22,481
Cr Cash 21,000
Cr Discount on bonds payable 1,481
amortization of discount = ($562,015 x 4%) - $21,000 = $22,481- $21,000 = $1,481
January 1, 2022, fourth coupon payment
Dr Interest expense 22,540
Cr Cash 21,000
Cr Discount on bonds payable 1,540
amortization of discount = ($563,496 x 4%) - $21,000 = $22,540- $21,000 = $1,523
Amortization schedule:
Period Interest Bond discount Interest Book
payment amortization expense value
0 $559,222
1 $21,000 $1,369 $22,369 $560,591
2 $21,000 $1,424 $22,424 $562,015
3 $21,000 $1,481 $22,481 $563,496
4 $21,000 $1,540 $22,540 $565,036