Question

AC 112 Assignment #2 Bonds Baxter Co. decides to issue the following bond: A $100,000 20-year Bond bearing 6% interest. Interest payments are to be made semi-annually. The current market rate for a similar bond is 8% Required: 1. Determine the issue price for the bonds. 2. Prepare the journal entry to record the issue of the bond. 3. Prepare the journal entry to record the first semi-annual interest payment assuming straight-line amortization

Answer 1

Since the interest on market ie 8% is higher than Coupon rate of bond ie 6%, the bond have to be issued at Discount.

First we compute the PV of semi annual interest payments and redemption value. It is as follows:

Since interest is semi annual, period = 40, coupon rate = 6%/2 = 3%, YTM = 8%/2 = 4%

Particulars	Period	Amount	Discount Rate	Discounted Cashflows
Interest	1-40	100000*3% = 3000	4%, for 40 years ie., 19.793	59379
Principal	40	100000	4% for 40th year., ie., 0.2083	20830
			TOTAL	80209

So, Discount to be amortized => 100000 - 80209 =19791 $

Hence since amortization is Straight line, Amortization amount = 19791/40 = 495 $.

1.Issue price of bond = $ 80209. (as per note above)

2. issue of Bond:

	Cash a/c Dr	80209
	Discount on issue of bond a/c Dr	19791
	To Bonds Payable a/c		100000

3.First semi annual interest payment:

Interest expense a/c Dr	3495
To Discount on issue of Bonds a/c		495
To Cash a/c (or interest Payable)		3000

Please comment in case of any query regarding the solution.