Question

On 1 January 20X1, EFG Pte Ltd issues long-term bonds which are due on 31 December 20X5. Interest is paid semi-annually on June 30 and December 31 each year. The first interest payment is on 30 June 20X1. The face value of bonds is $400,000 with stated annual interest rate of 10%. At the time of issuance, the market interest rate is 12% per annum.

1. Determine the price of the bonds issued by EFG Pte Ltd.
2. Illustrate the accounting by EFG Pte Ltd for the issuance of the bonds by preparing the necessary journal entries, journal narrative not required, for the year 20X1.

Answer 1

a]	Price of the bonds is the PV of the cash flows of the bond
	when discounted at 12% p.a [6% half yearly].
	The expected cash flows are the maturity value of the bonds
	of $400,000 receivable at EOY 5 and the semi-annual interest
	of $20000 payable for 10 half years.
	Hnece, price = 400000/1.06^10+20000*(1.06^10-1)/(0.06*1.06^10) =	$        3,70,560
b]	Cash	$        3,70,560
	Discount on bonds payable	$ 29,440
	Bonds payable		$     4,00,000