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Example #5, On January 1, 2019 a company issues 100 bonds, each for $1,000, for a...

Example #5, On January 1, 2019 a company issues 100 bonds, each for $1,000, for a premium, as the interest rate on the bond (stated/coupon rate) is 5% and the market rate is 4%. They then used this cash to purchase an automobile for $100,000 cash.  The bond is to be paid in at the end of THREE years (December 31, 2021).

Calculate the cash received from issuing bond:

Present value of maturity payment $100,000                       $  

Present value of interest payment ($100,000*.05=$5,000)  $  

Present value of cash payments                                             $

  1. PREPARE THE JOURNAL ENTRIES FOR 2019:

Date

Account Name

Debit

Credit

1/1/2019

12/31/2019

(Premium balance: 2,775.09-889.00=1,886.09)

  1. PREPARE THE JOURNAL ENTRIES FOR 2020:

Date

Account Name

Debit

Credit

12/31/2020

(Premium balance: 1,886.09-924.56=961.53)

  1. PREPARE THE JOURNAL ENTRIES FOR 2021:

Date

Account Name

Debit

Credit

12/31/2021

(Premium balance is now zero)

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Answer #1
Present value of Maturity       88,899.64 =PV(4%,3,0,-100000,0)
Add: Present value of Interest       13,875.46 =PV(4%,3,-100000*5%,0,0)
Present value of cash Payments $ 102,775.09
a.) Date Account Name Debit $ Credit $
1/1/2019 Cash 102,775.09
Bond Payable 100,000.00
Premium on Bond Payable        2,775.09
12/31/2019 Interest Expense ( 102,775.09 x 4% )         4,111.00
Premium on Bond Payable            889.00
Cash ( 100,000 x 5% )        5,000.00
b.) Date Account Name Debit $ Credit $
12/31/2020 Interest Expense ( 102,775.09 - 889 ) x 4%         4,075.44
Premium on Bond Payable            924.56
Cash ( 100,000 x 5% )        5,000.00
c.) Date Account Name Debit $ Credit $
12/31/2021 Interest Expense ( 102,775.09 - 889 - 924.56 ) x 4%         4,038.47
Premium on Bond Payable            961.53
Cash ( 100,000 x 5% )        5,000.00
12/31/2021 Bond Payable 1,00,000.00
Cash 1,00,000.00
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