Question

Q.3 Three year bonds are issued at face value of SR 100, 000 on Jan. 1, 2007, at a stated interest rate of 8%. Calculate the issue price of the bonds assuming a market interest rate of 10%. The present value of SR 1 is .75132 at 10% after 3 years and the present value of an ordinary annuity of SR 1 is 2.48685 at 10% after 3 years.

Prepare discount amortization table and journal entries for three years.

Answer 1

a.	Price of bonds is the present value of future cash flows:
	Present value of coupons		8,000.00	*	2.48685	=	19,894.80
	Present value of face value		1,00,000.00	*	0.75132	=	75,132.00
	Present value of cash flows						95,026.80
	So, Price of bond is
	Working:
	Coupon	=	Par Value	*	Coupon Rate
		=	1,00,000.00	*	8%
		=	8,000.00
b.	Discount amortization Schedule:
	Year	Beginning Book Value	Interest Expense	Coupon Payment	Amortization of discount	Ending Book Value
		a	b=a*10%	c	d=b-c	e=a-d
	1	95,026.80	9,502.68	8,000.00	1,502.68	96,529.48
	2	96,529.48	9,652.95	8,000.00	1,652.95	98,182.43
	3	98,182.43	9,818.24	8,000.00	1,818.24	1,00,000.67
	Total
c.	Journal Entries:
	Year	Account titles and Explanation		Debit	Credit
	0	Cash		95,026.80
		Discount on bonds payable		4,973.20
		Bonds Payable			1,00,000.00
		(To record issuance of bonds)
	1	Interest Expense		9,502.68
		Discount on bonds payable			1,502.68
		Cash			8,000.00
		(To record interest expense)
	2	Interest Expense		9,652.95
		Discount on bonds payable			1,652.95
		Cash			8,000.00
		(To record interest expense)
	3	Interest Expense		9,818.24
		Discount on bonds payable			1,818.24
		Cash			8,000.00
		(To record interest expense)