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Three-year bond with an 8% coupon rate sold to yield 10% on January 1, 2017.  Interest payable...

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Accounting

Three-year bond with an 8% coupon rate sold to yield 10% onJanuary 1, 2017.  Interest payable annually on December31. Callable at 105.  Face value: $100,000. Bond issuecosts: $5,000.

Required:
1. Calculation of premium or discount.

2. Recording of bond issuance.

3. Accounting entries.

Answer & Explanation Solved by verified expert
3.9 Ratings (458 Votes)

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

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Transcribed Image Text

Three-year bond with an 8% coupon rate sold to yield 10% onJanuary 1, 2017.  Interest payable annually on December31. Callable at 105.  Face value: $100,000. Bond issuecosts: $5,000.Required:1. Calculation of premium or discount.2. Recording of bond issuance.3. Accounting entries.

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