Question

1. Heyward Company issues 10-year bonds with a face value of $4,000,000 and a stated annual interest rate of 5%. The bonds pay interest semiannually on June 30 and December 31. The annual market rate of interest on the date of issue is 6%. Provide the journal entry that the company will make to record the bond issue.

Answer 1

We shall know the issue price of the bonds.

=> [present value of annuity factor *interest payment] + [present value factor * face value]

here,

present value of annuity factor = [1-(1+r)^(-n)]/r

r=6% market rate per year =>6%*6/12=>3% for six months

=>0.03.

n=10 years * 2 semi annual period =>20.

=>[1-(1.03)^(-20)]/0.03

=>0.4463243/0.03

=>14.8774767.

interst payment = $4,000,000*5%*6/12

=>$100,000.

present value factor = 1/(1+r)^n

=>1/(1.03)^20

=>0.55367575.

face value =$4,000,000

so issue value of bonds = [14.8774767*100,000]+[0.55367575*4,000,000]

=>$3,702,450.67.

discount on bonds payable = 4,000,000-3,702,450.67 =>297,549.33.

the following will be the journal entry to record the issuance of bonds;

sno	Accounts	Debit	credit
1	Cash	3,702,450.67
	Discount on bonds payable	297,549.33
	bonds payable		4,000,000