Question

On March 1, 2018, Bowan Corporation issued 6% bonds dated January 1, 2018 with a par value of $800,000. The bonds were sold for the present value of the bonds on March 1, 2018 plus two-month accrued interest. The bonds mature on December 31, 2023. Interest is paid semiannually on Jun 30 and December 31. Bowan's fiscal year ends on December 31 each year. The effective interest rate is 8%.

Required:

a. Determine the present value the bonds on March 1, 2018 and the amount of accrued interest that was included in the proceeds received from the bond sale. Show calculations.

b. Prepare the journal entry for the issuance of the bonds on March 1, 2018.

c. Prepare the journal entry for the interest payment on June 30, 2018.

please explain in detail A, and prepare the journal entry for B and C

Answer 1

Requirement a:

Present value of the interest payment	$225,242
[$24,000 x 9.385074 present value annuity factor (12 years, 4%)
Present value of the bond face value	$504,136
[800,000 x 0.63017 present value ordinary factor (6 years, 8%)
Present value of the bonds/bond issued for	$729,378

Interest payment (semi-annual) = $800,000 x 6% x (6 months/12 months) = $24,000

Interest is paid semi-annually, So that present value annuity factor taken at 12 years 4%. This is equal to present value annuity factor(semi-annual) at 6 years, 8%.

Requirement b:

Date	Account title and explanation	Debit	Credit
Mar 1,2018	Cash	$737,378
	Discount on bonds payable	$70,622
	Bonds payable		$800,000
	Interest expense (800,000 x 6% x 2/12)		$8,000
	[To record issuance of bonds payable]

Requirement c:

Date	Account title and explanation	Debit	Credit
June 30,018	Interest expense (729,378 x 8% x 1/2)	$29,175
	Discount on bonds payable	$5,175
	Cash (800,000 x 6% x 1/2)		$24,000
	[To record payment of interest]

Explanations:

Bond issued at 6% interest rate. But, the market value of the interest is 8%. For the difference in interest rate bonds are issuing at discount. When bonds are issued at discount, Interest expense is recorded at market rate 8% and interest will be paid at 6%. The difference will be rectified by 'discount on bonds payable'.