Solution
Date | Account Title and Explanation | Debit | Credit |
January 01, 2019 | Cash | $ 2,309,262 | |
Premium on bonds payable | $ 139,262 | ||
Bonds payable | $ 2,170,000 | ||
(To record Issuance of bonds ) |
Working
Bonds issue price is calculated by ADDING the: |
Discounted face value of bonds payable at market rate of interest, and |
Discounted Interest payments amount (during the lifetime) at market rate of interest. |
.
Annual Rate | Applicable rate | Face Value | $ 2,170,000 | ||
Market Rate | 9.00% | 9.00% | Term (in years) | 10 | |
Coupon Rate | 10.00% | 10.00% | Total no. of interest payments | 10 |
.
Calculation of Issue price of Bond | ||||||||
Bond Face Value | Market Interest rate (applicable for period/term) | |||||||
PV of | $ 21,70,000 | at | 9.00% | Interest rate for | 10 | term payments | ||
PV of $1 | 0.42241 | |||||||
PV of | $ 21,70,000 | = | $ 2,170,000 | x | 0.42241 | = | $ 916,630 | A |
Interest payable per term | at | 10.00% | on | $ 2,170,000 | ||||
Interest payable per term | $ 217,000 | |||||||
PVAF of 1$ | for | 9.00% | Interest rate for | 10 | term payments | |||
PVAF of 1$ | 6.41766 | |||||||
PV of Interest payments | = | $ 217,000 | x | 6.41766 | = | $ 1,392,632 | B | |
Bond Value (A+B) | $ 2,309,262 |
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