Question

Bobcat buys 8%, 20-year bonds with a face amount of $100,000 on January 1, 20x4. The market yield for bonds of similar risk and maturity is 10%. Interest is paid semiannually on June 30th and December 31st. Book the appropriate Journal Entries for the year.

Answer 1

Given that :

Face Value = $100,000

Interest Rate = 8% = 4% (Semi - Annual)

Discount Rate = 10% = 5%(Semi - Annual)

Period = 20 years =40 (Period - Semi -annual)

A)Present value of Principal Amount

= $100,000* PV(5%, 40 (Period))

= $100,000*0.142046

= $14,205

B) Present value of annuity of semi- annual interest

Semi annual Interest = $100,000*4% = $4,000

   = $4,000* PVIFA(5%, 40 (Period))

=$4,000*17.15909

= $68,636

Total Price of Bond = Present value of Principal Amount + Present value of annuity of semi- annual interest

= $14,205 + $68,636

= $82,841

Appropriate journal entry is as follows:

Date	Account and explanation	Debit($)	Credit($)
Jan.1,20X4	Cash	82,841
	Discount Bond Payable($1,00,000 - $82,841)	17,159
	Bond Payable		100,000
	(Bond issued at discount)