Question

Taro company is going to issue 100 $1,000 face value bonds with a stated interest rate of 6% and a duration of 8 years. on the date of issuance, the market rate for similar debt securities is 10%.

Requirements:

1. Calculate the Bond Price

2. Create a journal entry for the Bond's Issuance

3. Amortize the bond using effective interest amortization for the entire life of the bond

4. Create the journal entry to record interest in year 5

5. Retire the bond during year 6 at 99 and record the journal entry

Answer 1

1. Calculation of Bond issue price:

Present value of interest	$        320.00
Present value of face value	$        468.50
Bond price	$        786.50

Bond issue price of 100 bonds = $786.50 x 100 = $78,650

Calculations:

• Present value of interest = Interest per year x Present value annuity factor (10%, 8 Years) = (1,000 x 6%) x 5.334926198 = 320.10
• Present value of face value = Face value x Present value factor (10%, 8 Years) = 1,000 x 0.46650738 = 466.50

2. Journal entry for Bond's Issue:

Date	Account Title and Explanation	Debit	Credit
Year 1	Cash	$78,750
	Discount on Bonds payable	$21,250
	Bonds payable		$100,000
	[Issued bond at discount]

3. Amortization of discount:

Year	Cash paid	Interest Expense	Discount Amortized	Carrying value of the Bonds
0				$       78,650.00
1	$ 6,000.00	$ 7,865.00	$ 1,865.00	$       80,515.00
2	$ 6,000.00	$ 8,051.50	$ 2,051.50	$       82,566.50
3	$ 6,000.00	$ 8,263.00	$ 2,263.00	$       84,829.50
4	$ 6,000.00	$ 8,482.95	$ 2,482.95	$       87,312.45
5	$ 6,000.00	$ 8,738.00	$ 2,738.00	$       90,050.45
6	$ 6,000.00	$ 9,012.00	$ 3,012.00	$       93,062.45
7	$ 6,000.00	$ 9,313.00	$ 3,313.00	$       96,375.45
8	$ 6,000.00	$ 9,644.00	$ 3,644.00	$     100,019.45

Explanations:

• Cash paid (interest paid) = $100,000 x 6% = $ 6,000.
• Interest expense = Carrying value x 10%

4. Journal entry to record interest in year 5:

Date	Account Title and Explanation	Debit	Credit
Year 5	Interest expense	$ 8,738
	Cash		$ 6,000
	Discount on Bonds payable		$    2,738
	[Interest expense]

5. Journal entry for If the bonds redeemed on 6th Year at 99:

Date	Account title and explanation	Debit	Credit
Year 6	Bonds payable	$ 100,000
	Gain on redemption of bonds	$      5,957
	Cash (100,000 x 0.99)		$    99,000
	Discount on bonds payable		$      6,957
	[Bond retirement at $99]

Calculation: Unamortized discounted = Discount amortized for Year 7&8 = $3,313+$3,644 = $ 6,957