Question

Anderson/ Thurow Company issued $1,000,000 of five year bonds on Jan 1, 20X1. The bonds carried a face or coupon rate of 12% with interest to be paid semi-annually on June 30th and Dec 31st. At the issuance date, the market interest rate for such bonds was 10%.

A. Calculate the issuance price for the bonds and show the journal entry to record their issuance.

B. Provide an amortization table for the first two periods.

C. Show the journal entries that would be made to accompany the first two periodic coupon interest payments.

Answer 1

To calculate the approximate price that an investor will pay for the
corporation's bond, we need to calculate the bond's
present value. The present value of the bond is the total of:

1. The present value of the bond's interest payments that will occur every six months, PLUS
2. The present value of the principal amount that occurs when the bond matures

1. PVOA= PMT*PVOA factor for n=10 semiannual periods,i=5% per semiannual period

= 60000*7.722

=$463320

2. PV= FV* PV factor for n=10 semiannual periods,i=5% per semiannual period

=$1000000*0.614

=$614000

The bond's total present value= $1077320

Cash A/c Dr. 1077320

To Bonds Payable 1000000

To Bonds Premium     77320

B. Amortization Table

N	Interest	Payment	Balance	Premium
0			10,77,320
1	53,866	60,000	10,71,186	6,134
2	53,559	60,000	10,64,745	6,441

C.

Bonds Interest expense Dr. 60000

To Cash 60000