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Financing Option #2

Issue $500,000 of bonds. The bond issue would be developed with a stated rate of 6% and would be a 10-year bond with interest paid semi-annually on June 30 and December 31. The current market rate for a similar bond is 4%. Sam would like the journal entry for the bond issue and the journal entry for the first two interest payments. SSV would use the effective interest rate to amortize any bond dis-count or premium.

 

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Answer #1

According to the given data

Face Value of Bonds==>500,000

as coupen rate is missing in the question

lets assume that 6% as the coupen rate

Semiannual Coupon Rate==>3.00%

Semiannual Coupon==>3.00% * $500,000

Semiannual Coupon==>$15,000

Time to Maturity==>10 years

Semiannual Period==>20

Annual Interest Rate==>4.00%

Semiannual Interest Rate==>2.00%

Issue Value of Bonds ==>$15,000 * PVIFA(2.00%, 20) + $500,000 * PVIF(2.00%, 20)
Issue Value of Bonds==>$15,000 * (1 - (1/1.02)^20) / 0.02 + $500,000 / 1.02^20
Issue Value of Bonds==>$581,757

Date Cash Paid Jan. 01 Interest Premium Unamortized Carrying Value Expense Amortized Premium $ 81,757 $ 581,757 11,635 $ 3,36

Credit Date Jan. 01 Debit 581,757 $ $ 500,000 81,757 June 30 General Journal Cash Bonds Payable Premium on Bonds Payable Inte

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