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 |
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DEBIT to Bond Payable for $1,000,000 |
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DEBIT to Cash for $1,000,000 |
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CREDIT to Premium on Bond Payable for $107,750 |
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CREDIT to Cash for $1,110,900 |
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DEBIT to Cash for $1,107,750 |
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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