Question

On January 2017, BobCat Inc. issued $300,000 seven year bonds with 8% stated interest paid semiannually. Effective interest rate was 7%. How much cash did BobCat Inc. received a result of the bond issuance and what was the journal entry?

Answer 1

Semi Annual interest payment = 300,000 x 8% x 6/12
= $12,000

Present value of principal to be received at the maturity = Par value of bonds x Present value factor (r%, n)

= 300,000 x Present value factor (3.5%, 14)

= 300,000 x 0.61778

= $185,334

Present value of interest to be received periodically over the term of the bonds = Interest x Present value annuity factor (r%, n)

= 12,000 x Present value annuity factor (3.5%, 14)

= 12,000 x 11.30274

= $135,633

Issue price of bond = Present value of principal to be received at the maturity + Present value of interest to be received periodically over the term of the bonds

= $185,334+135,633

= $320,967

Par value of bonds = $300,000
Cash receipts from issue of bonds = $320,967
Premium on bonds payable = Cash receipts from issue of bonds - Par value of bonds
= $320,967-300,000
= $20,967

Date	General Journal	Debit	Credit
	Cash	$300,000
	Bonds payable	$20,967
	Premium on bonds payable		$320,967
	( To record issue of bonds at premium)

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