Question

Determine the selling price (present value) for the following bonds, and make the journal entry to record each bond's issuance.

A $50,000, 8-year, 14% bond is sold when market interest rates are 13%. The bond pays interest semiannually.

Answer 1

Answer:- The selling price of bonds is = $52442.16.

Explanation-Calculation of selling price of bond at issuance=

                B₀ =C/2 {1-(1+r/2)^-2t}/ r/2 +F/(1+r/2)^-2t

Where:-

Bo = Bond price

C= Coupon payment

r = Interest Rate

F= Face value

t = Years/Periods

Since the interest is paid semi-annually the bond interest rate per period is 7% (= 14%/ 2), the market interest rate is 6.5% (= 13%/ 2) and number of time periods are 16 (= 2*8). Hence, the price of the bond is calculated as the present value of all future cash flows as shown below:-

Price of Bond =7%*$50000*{1-(1+6.5%)^-16/6.5%} +$50000/(1+6.5%)¹⁶

                         =($3500*9.76776)+ ($50000*0.36510)

                        = $34187.16+$18255

                       =$52442.16

Journal entry for bonds issuance-

Transactions	Accounts Titles & Explanation	Debit	Credit
		$	$
1	Cash	52442.16
	Premium on bonds payable		2442.16
	Bonds payable		50000
	(Being entry recorded for bonds issuance)