Question

Bringham Company issues bonds with a par value of $800,000. The bonds mature in 10 years and pay 6% annual interest in semiannual payments. The annual market rate for the bonds is 8%. (Table B.1. Table 8.2. Table 8.3, and Table B.4) (Use appropriate factor(s) from the tables provided.)

 1. Compute the price of the bonds as of their issue date.

 2. Prepare the journal entry to record the bonds' Issuance. 

Answer 1

Correct Answer:

Table value are based on
n=	3%
i=	4%
Cash Flow	table value	*	Amount	=	Present value
Par (maturity) value	$ 0.46	*	$ 800,000.00	=	$ 365,040.00
Interest (annuity)	$ 13.59	*	$    24,000.00	=	$ 326,167.20
Price of bonds					$ 691,207

Date	Description	Debit	Credit
	Cash	$    691,207
	Discount on bonds Payable	$    108,793
	Bonds payable		$           800,000
	(Issue of bonds )

Working:

	Annual Rate	Applicable rate		Face Value	$               800,000.00
Market Rate	8.00%	4.00%		Term (in years)	10
Coupon Rate	6.00%	3.00%		Total no. of interest payments	20

Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$                     800,000	at	4.00%	Interest rate for	20	term payments
PV of $1	0.45639
PV of	$                     800,000	=	$                  800,000	x	0.4563	=	$                 365,040	A
Interest payable per term	at	3.0%	on	$                           800,000
Interest payable per term	$                       24,000
PVAF of 1$	for	4.0%	Interest rate for	20	term payments
PVAF of 1$	13.59033
PV of Interest payments	=	$        24,000.00	x	13.5903	=		$                 326,167	B
				Bond Value (A+B)			$                 691,207

End of answer.

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Answer 2

1) Issue price of bonds = (800000*3%*13.59033+800000*0.45639) = 691280

2) Journal entry

date	account and explanation	debit	Credit
	Cash	691280
	Discount on bonds payable	108720
	Bonds payable		800000
	(To record bond issue)