Question

OhSoPoor, Inc (OSP) was exceptionally short on cash during 2019 and issued a series of loans to cover their cash shortfall. The market rate of interest for all the bonds was 5%. For each bond, record the journal entry following transactions:

(a) Theissuanceofthebond.
(b) Thefirstinterestpaymentafterissuanceofthebond. (c) TheinterestpaymentoraccrualatDecember31,2019.

Bond A: This is a zero-interest, $100,000 bond which matures in 5 years and is issued on January 1, 2019.

Bond B: This bond is a 15-year, $500,000 bond which pays interest at 6%. This bond was issued on February 1, 2019 and pays interest on June 30, and December 31 of each year.

Bond C: This is a 10-year, 4%, $200,000 bond. This bond was issued on April 1, 2019 and pays interest on March 31 and September 30 of each year.

Bond D: This is a 7.5 year, 8% bond with a maturity value of $400,000. The bond pays interest at the end of every calendar quarter. This bond was issued on July 1, 2019.

Answer 1

If the market rate and the contract rate of interest are different, the bonds would sell at
premium or discount.
If the contract rate is less than market rate, the bonds sell at discount
If the contract rate is more than market rate, the bonds sell at premium
The formula to compute the issue price/selling price of Bond is as under
PV = r * B *( 1 - (1+mr) ^ -(n*p) + B/(1+mr)^(n*p)
where, PV = Issue price of Bond
B = Face value/Par Value of the Bond
r = coupon rate of the Bond
mr = market rate of interest
n = no of years to maturity
p = frequency of bond interest payment in a year
Computation of issue price of bonds by using the formula above
Bond A
= 0 * 100,000 * (1-(1.05) ^-(5*1))/r + 100,000/(1.05) ^ 5
= 0+ (100,000)/(1.2763)
= 0+ 78,351
Issue Price = $ 78,351
Bond B
= 0.06 * 500,000 * (1-((1.05) ^-(15*2))/.05 + 500,000/((1.05) ^ (15*2))
= 30,000 * 1-(1.05 ^ -30)/0.05 + 500,000/(1.05^30)
=30,000 * (1 - (0.2314)/0.05) + 500,000/4.3219
= 30,000 * 15.372 + 115690
= 461160+115690
= 576850
Issue Price = $ 576,850
Bond C
= 0.04 * 200,000 * (1-((1.05) ^-(10*2))/.05 + 200,000/((1.05) ^ (10*2))
= 8000 * (1-0.3769)/0.05 + 200000/2.6533
= 8000 * 0.6231/0.05 + 75378
= 8000 * 12.462 + 75378
= 99696 + 75378
= 175074
Issue Price = $ 175,074
Bond D
= 0.08 * 400,000 * (1-((1.05) ^-(7.5*4))/.05 + 400,000/((1.05) ^ (7.5*4))
= 0.08 * 400,000 * (1-((1.05) ^-30)/.05 + 400,000/((1.05) ^ (30))
= 32000 * (1-0.2314)/.05 + 400000/4.3219
= 32000 * 0.7686/.05 +92552
=32000 * 15.372 +92552
= 584456 + 92552
= 677008
Issue Price = $ 677,008
Journal Entries
Date	Account Title and Explanation	Debit	Credit
Jan 1	Cash	78,351
	Discount on Bond A payable	21,649
	Bond A payable		100,000
	(to record the issue of issue of zero interest Bond A with par value of $ 100,000 at discount)
Feb 1	Cash	576,850
	Premium on Bond B payable		76,850
	Bond B payable		500,000
	(to record the issue of issue of 6% Bond B with par value of $ 500,000 at premium)
Apr 1	Cash	175,074
	Discount on Bond C payable	24,926
	Bond C payable		200,000
	(to record the issue of issue of 4% Bond C with par value of $ 200,000 at discount)
Jul 1	Cash	677,008
	Premium on Bond D payable		277,008
	Bond D payable		400,000
	(to record the issue of issue of 6% Bond B with par value of $ 500,000 at premium)
June 30	Interest Expense	10,365
	Premium on Bond B payable	2,135
	Cash		12,500
	(to record the interest expense and amortization of premium payable on Bond B)
Sep 30	Interest Expense	11,739
	Discount on Bond C payable		3,739
	Cash		8,000
	(to record the interest expense and amortization of discount on Bond C)
Sep 30	Interest Expense		1,233
	Premium on Bond D payable	9,233
	Cash		8,000
	(to record the interest expense and amortization of premium payable on Bond D)
Dec 31	Interest Expense	12,438
	Premium on Bond B payable	2,562
	Cash		12,500
	(to record the interest expense and amortization of premium payable on Bond B)
Dec 31	Interest Expense	4,330
	Discount on Bond A payable		4,330
	(to record the interest expense and amortization of discount on Bond A)
Dec 31	Interest Expenses	3,869
	Discount on Bond C payable		1,869
	Accrued Expenses		2,000
	(to record the interest expense and amortization of discount on Bond C)
Dec 31	Interest Expense		1,233
	Premium on Bond D payable	9,233
	Cash		8,000
	(to record the interest expense and amortization of premium payable on Bond D)