Question

Example #4, On January 1, 2019 a company issues 100 bonds, each for $1,000, for a discount, as the interest rate on the bond (stated/coupon rate) is 3% 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*.03=$3,000)  $  

Present value of cash payments                                             $

1. PREPARE THE JOURNAL ENTRIES FOR 2019:

Date	Account Name	Debit	Credit
1/1/2019
12/31/2019

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

2. PREPARE THE JOURNAL ENTRIES FOR 2020:

Date	Account Name	Debit	Credit
12/31/2020

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

3. PREPARE THE JOURNAL ENTRIES FOR 2021:

Date	Account Name	Debit	Credit
12/31/2021

(Discount balance is now zero)

Answer 1

Calculate the cash received from issuing bond:
Present value of maturity payment (100,000 x 0.889)		88,900.00
Present value of interest payment (3,000 x 2.775)		8,324.91
Present value of cash payments		97,224.91
Date	Account Titles and Explanation	Debit	Credit
1/1/2019	Cash	97,224.91
	Discount on Bonds Payable	2,775.09
	Bonds Payable		100,000.00
12/31/2019	Interest Expense	3,889.00
	Discount on Bonds Payable		889.00
	Cash		3,000.00
12/31/2020	Interest Expense	3,924.56
	Discount on Bonds Payable		924.56
	Cash		3,000.00
12/31/2021	Interest Expense	3,961.53
	Discount on Bonds Payable		961.53
	Cash		3,000.00