Question

X Co. issued 7% bonds with a face value of $200,000. At time of issue, the market interest rate for similar bonds was 8%. The bonds had a five-year life and paid interest annually (to keep the problem straightforward). At what price were the bonds issued. Record the entry for issuance. In class (or at home if you like), prepare a bond interest amortization schedule, using Excel.

Answer 1

Given that :

X company issued bonds of 7 percent having face value of $ 200,000.

At the time of issue the market rate of interest is 8 percent.

Life of the bonds = 5 years

And interest is paid annually.

Now computing the issue price of bond:

Issue price of bond = ($ 200,000 x 7%) x PUIFA (8%, 5 periods) + ($ 200,000) x PUIF (8%, 5th period)

= ($ 14,000 x 3.99271) + ($ 200,000 x 0.68058)

= ($ 55,897.94) + ($ 136,116)

= $ 192,014

Journal entry of issuance of bond at the beginning of year 1

Date/ period General journal Debit Credit

Beginning of Cash A/c $192,014

period 1 Discount of bond $ 7986

payable A/C

To bond payable a/c $200,000

Bond amortisating schedule using effective interest rate:

Period Interest expense Interest expense Discount Closing of

paid in advance record book value

Beginning

of period 1 $192,014

Period 1 $14,000 $15361 $ 1361 $193,375

($192,014 x 8%)

Period 2 $14,000 $15470 $1470 $194845

($193,375 x 8%)

Period 3 $14,000 $15588 $ 1588 $196433

($194845 x 8%)

Period 4 $14,000 $15715 $ 1715 $198148

($196433 x 8%)

Period 5 $14,000 $15852 $ 1852 $200000

($198148 x 8%)