Question

On January 1 20X1, Jude Company issues bonds with a face value of $1,000,000 in exchange...

On January 1 20X1, Jude Company issues bonds with a face value of $1,000,000 in exchange for cash. On that date the market rate is 12%. The bond has a stated rate of 15% and matures in five years. Interest is paid every four months. Which of the following is part of the journal entry that Jude Company records at the date of the bond issuance.

CREDIT to Premium on Bond Payable for $110,900

DEBIT to Bond Payable for $1,000,000

DEBIT to Cash for $1,000,000

CREDIT to Premium on Bond Payable for $107,750

CREDIT to Cash for $1,110,900

DEBIT to Cash for $1,107,750

Homework Answers

Answer #1

Premium on bonds will be calculated by discounting the interest payments and redemption value by market rate.

It will be in premium because company is paying interest on bond more then market rate

Interest= 1000000 x 15% x 4/12 =$50000

Rate for discounting = 12% / 3 =4% ( since every 4 month which makes 3 times in a year)

Time = 5year x 3 = 15 months (there will be 15 payments , once every 4 month makes 3 in a year which makes 15 in 5year)

50000 PV 4% cumulative for 15 terms = 11.1183874 555635
1000000 (redemption) PV 4% for 15th term =0.555264502 555265
Total 1110900

Discount on issue is 1110900-1000000 =110900

Cash (debit) 1110900
Discount on issue (credit) 110900
Bonds Payable (credit) 1000000

Part of entry

CREDIT to Premium on Bond Payable for $110,900

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