Question

Company Z issued a $4 million 5 year bond at a stated rate of 8%, on January 1 the bond was sold to yield 10%. What is the entry to record the issuance of the bond and what is the year end entry at the end of the second year

Answer 1

Solution:

Computation of bond price
Table values are based on:
n=	5
i=	10.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.62092	$4,000,000.00	$2,483,680
Interest (Annuity)	3.79079	$320,000.00	$1,213,052
Price of bonds			$3,696,732

Bond Amortization Schedule (Partial)
Period	Cash Paid	Interest Expense	Discount Amortized	Unamortized Discount	Carrying Value
Year 1, Jan 1				$303,268	$3,696,732
Year 1, Dec 31	$320,000	$369,673	$49,673	$253,595	$3,746,405
Year 2, Dec 31	$320,000	$374,641	$54,641	$198,954	$3,801,046

Journal Entries - Company Z
Date	Particulars	Debit	Credit
Year 1, Jan 1	Cash Dr	$3,696,732.00
	Discount on issue of bond Dr	$303,268.00
	To Bond Payable		$4,000,000.00
	(To record issue of bond at discount)
Year 2, Dec 31	Interest expense Dr	$374,641.00
	To Discount on issue of bond		$54,641.00
	To Cash		$320,000.00
	(To record interest expense and discount amortization)