Question

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On January 1, 2019, Drennen Inc. issue $4.1 million face amount of 9 yr, 18% stated rate bonds when market interest rates were 16%. The bonds pay semiannual interest each June 30th and December 31st and mature on December 31, 2027. (Table 6-4, 6-5)

a. Calculate the proceeds (issue price) of Drennen Inc.'s bonds on January 1, 2019, assuming that the bonds were sold to provide a market rate of return to the investor.

Proceeds:_________________

b. Assume instead that the proceeds were 4,060,000.Record the journal entry to show the payment of semiannual interest and the related discount of amoritzation on June 30th 2019, assuming that the discount of $40,000 is amortized on a straight line basis

Answer 1

a) Present value of the bonds= Present value of Principal+Present value of interest

Present value of Principal= $4100000*0.2502= $1025820

Present value of interest= $4100000*18%*6/12*9.3719= $3458231.1

Present value of the bonds= $1025820+3458231.1= $4484051.1

The proceeds (issue price) of Drennen Inc.'s bonds on January 1, 2019= $4484051.1

b) Discount on bonds payable= $4100000-4060000= $40000

Date	Account titles and explanation	Debit	Credit
June 30, 2019	Interest expense ($369000+2222)	$371222
	Cash ($4100000*18%*6/12)		$369000
	Discount on bonds payable ($40000/18)		$2222
	(To record cash payment and amortization of discount)