Question

On October 1, 2016 Macklin Corporation issued 10-year bonds with a face value of $50,000,000.  Interest is paid annually on December 31.  The company uses the effective interest method. Coupon Rate 6.5%. Market Rate 6%.

1. Find the issue price.
2. The entry to record the issuance of the bonds.
3. Prepare the journal entry to record the first interest payment on December 31.

Answer 1

a. Calculation of Issue Price of Bond: Issue Price = Present Value of Interest Payaments + Present Value of Maturity Proceeds Present Value of Interest Payments: Annual Interest Paid = $50,000,000 x 6.5% = $3,250,000.00 Life of Bond is 10 Years. Market Rate of Interest = 6% Present Value of Annuity Factort of 6% interest rate for 10 Period from PVA of $1 table is 7.3601 Present Value of Annual Interest Payments = $3,250,000 x 7.3601 = $23,920,325.00 Present Value of Maturity Proceeds: Cash Paid on Maturity Date = $50,000,000 Present Value of $1 for 10 Periods at 6% rate is 0.5584 Present Value of Maturity Proceeds = $50,000,000 x 0.5584 = $27,920,000.00 Issue Price = $23,920,325 + $27,920,000 = $51,840,325.00

Journal Entries Date Account Title and Explaination Debit Credit Post. Ref. b $ 51,840,325.00 Cash Bonds Payable Premium on Bonds Payable (To record issue of Bonds) $ $ 50,000,000.00 1,840,325.00 $ $ 3,110,419.50 139,580.50 Interest Expense Premium on Bonds Payable Cash |(To record first annual interest payment) $ 3,250,000.00