Question

X Company issued at par 4-year term bonds with a par value of $100,000, dated January 1, 2020, and bearing interest at an annual rate of 6 percent payable annually on December 31. At the time of issue, the market rate for such bonds is 9 percent. X amortizes the discount or premium using effective interest rate method.

Required:

1- Compute the selling price of bond.

2- Record the journal entry.

3- Prepare schedual of amortization.

4- Record the adjusting entries for all years.

5- Record the jornal entry of paying the principle at the end of period.

Answer 1

Answer:-

1) Selling Price Computation

Price = [Coupon x PVIFA(9%,4)] + [Par value x PVIF(9%,4)]

= [100,000 x 6% x 3.2397] + [100,000 x 0.70843] = 19,438 + 70,843 = 90,281

2) Journal entry passed at the time of issue

Cash A/c Dr $90,281

Discount on bonds A/c Dr  $9,719

To Bonds Payable A/c $100,000

3) Schedule of amortization

Year	Cash Paid	Interest	Discount	Net Carrying Value
			9,719	96,281
1	6,000	8,125	-2,125	92,406
2	6,000	8,316	-2,316	94,722
3	6,000	8,525	-2,525	97,247
4	6,000	8,753	-2,753	1,00,000
			0

In the amortization take, Interest is determined utilizing Effective Interest Rate (EIR) strategy.

Premium will be Net Carrying measure of security increased by the market rate

4) Adjusting entries

Accepting the schedule year as bookkeeping year. So no intrigue accumulation sections are accounted at year end and intrigue cost is accounted at the hour of installment.

All the below entries are accounted on 31st December of respective year

For 1st  year

Interest Expense A/c Dr $8,125

To Cash A/c    $6,000

To Discount on bonds A/c $2,125

For 2nd year

Interest Expense A/c Dr $8,316

To Cash A/c $6,000

To Discount on bonds A/c $2,316

For Third year

Interest Expense A/c Dr $8,525

To Cash A/c $6,000

To Discount on bonds A/c $2,525

For Fourth year

Interest Expense A/c Dr $8,753

To Cash A/c $6,000

To Discount on bonds A/c $2,753

5) Entry for repayment of the Principal amount

Bonds Payable $100,000

Cash $100,000

Note : PVIFA = Present Value Interest Factor Annuity

PVIF = Present Value Interest Factor

These qualities are processed utilizing mini-computer, we can likewise get these qualities utilizing present worth tables accessible on the web

There might be $1 contrast in Interest cost because of adjusting