Question

Company Z issued a $4 million, 5 year bond at a stated rateof 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 entrry at the end of the second year?

Answer 1

Journal Entry to record the issuance of the bond:

Account title and Explanation	Debit	Credit
Cash	$3,696,733
Discount on bonds payable	$303,267
Bonds payable		$4,000,000
[To record issuance of bonds]

Calculations:

Interest payment = $4,000,000 x 8% = $320,000

Present value of interest payments	$1,213,053
[$320,000 x 3.79079 present value annuity factor (10%, 5 years)]
Present value of face value	$2,483,680
[$4,000,000 x 0.62092 present value factor (10%, 5 years)]
Issue price of the bonds	$3,696,733

Year end entry at the end of the second year:

Account title and Explanation	Debit	Credit
Interest expense	$374,641
Discount on bonds payable		$54,641
Cash		$320,000
[To record payment of interest]

Calculations:

Interest Amortization Table (Partial)
Year	Cash paid	Interest expense	Discount amortized	Carrying value
				$3,696,733
Year 1	$320,000	$369,673	$49,673	$3,746,406
Year 2	$320,000	$374,641	$54,641	$3,801,047

Interest expense = Preceding carrying value x 10%

Discount amortized = Interest expense - Cash paid

Carrying value = Preceding carrying value + Discount amortized