Question

Bringham Company issues bonds with a pay value of 650,000. The bonds mature in 5 years and pay a 6% annual interest in semiannual payments. The annual market rate for the bonds is 8%.

1. Compute the price of the bonds as of their issue date.

2. Prepare the journal entry to record the bonds' issuance.

(Specifically I am struggling in figuring out what table value I am supposed to multiply with the amounts)

Answer 1

(1)-The price of the bonds as of their issue date

The issue (sale) price of the bond is the Present Value of the Coupon Payments plus the Present Value of the face Value

Par Value of the bond = $650,000

Semi-annual coupon amount = $19,500 [$650,000 x 6.00% x ½]

Semi-annual Yield to Maturity of the Bond = 4.00% [8.00% x ½]

Maturity Period = 10 Years [5 Years x 2]

Therefore, the Issue Price of the Bond = Present Value of the Coupon Payments + Present Value of the face Value

= $19,500[PVIFA 4.00%, 10 Years] + $650,000[PVIF 4.00%, 10 Years]

= [$19,500 x 8.1109] + [$650,000 x 0.6756]

= $158,163 + $439,140

= $597,303

“Hence the Issue Price of the Bond will be $597,303”

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)n} / r], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.  

-The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)n], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.  

(2)-The journal entry to record the bonds' issuance

Accounts Tittles and explanations	Debit ($)	Credit ($)
Cash A/c	597,303
Discount on Bond Payable A/c	52,697
To Bond Payable A/c		650,000
[Journal Entry to record the issuance of bond]

The Discount on Bond Payable = Face Value of the Bond – Issue price of the Bond

= $650,000 - $597,303

= $52,697