Question

Ayayai Corporation sold 160 convertible, 10-year bonds at par for $160,000. Each bond pays 4% annual...

Ayayai Corporation sold 160 convertible, 10-year bonds at par for $160,000. Each bond pays 4% annual interest and each bond can be converted to ten common shares at the bondholder’s request. When the bonds were issued common shares were trading for $14 per share. The market rate of interest for similar bonds without conversion rights was 6%.

Prepare the journal entry to record the issuance of the bonds. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

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Answer #1

Journal entries:

No.

Account Title & Explanation

Debit

Credit

(a)

Cash

$136447

Discount on issue of Bonds

$23553

   Bond Payable

$160000

(To record issuance of Bonds)

Explanation:

Computation of Issue price of Bond:

Face value = $160000

Annual Interest Expense = $160000 x 4% = $6400

n = 10

Market Interest rate = 6%

Issue price of Bonds = Coupon Amount x Present Value Annuity factor (r,n) + Face Value x Present Value Interest Factor(r,n)

= $6400 x Present Value Annuity factor (6%,10) + $160000 x Present Value Interest Factor (6%,10)

= $6400 x 7.36009 + $160000 x 0.55839

= $47104.58 + $89342.4

= $136446.98 i.e. $136447

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