Question

AP10-6A  

(Bond issuance price, carrying value, and journal entries)

Urry Power Ltd. issues bonds and receives proceeds of $57,069,000. The bonds mature in 13 years and carry a 9% interest rate paid semi-annually. The bonds were issued at a price of 126.82 to yield 6%.

Required

a.  

Show the journal entry to record the issuance of the bonds.

b.  

Determine the face value of the bonds and explain why the issuance price of the bonds is not the same as the face value.

c.  

Show the journal entries to record the first two semi-annual interest payments on these bonds. Ignore year-end accruals of interest.

d.  

The carrying value of the liability for these bonds equals the original proceeds received by Urry Power. Will the carrying value of the liability increase over time, or decrease? Explain briefly.

Answer 1

Journal entry

Date	account and explanation	debit	credit
	Cash	57069000
	Bonds payable		45000000
	Premium on bonds payable		12069000
	(To record bond issue)

b) Face value of bonds = 57069000*100/126.82 = 45000000

Market interest rate is not equal to stated interest rate so face value is not same as issuance price

c) Journla entry

Date	account and explanation	debit	credit
	Interest expense	1976192
	Premium on bonds payable (1269000/26)	48808
	Cash (45000000*4.5%)		2025000

Carrying value of liability will decrease over time because as time decrease carrying value must be equal to face value