Question

. A company issued 5-year, 7% bonds with a par value of $250,000. The market rate when the bonds were issued was 4.0% on 1/1/19. Interest is paid 2 times per year on 6.30 and 12.31. Calculate the sale price and record the journal entry for this sale. Using the straight-line method, calculate the amount of interest expense for the first semiannual interest period and record the journal entry

Answer 1

	Determination of Sale Price :-
	Face Value of Bond	=	$250,000
	Life of Bond (in years)	=	5
	Maturity amount of Bond		$250,000
	Coupon rate	=	7% per year payable semi annually i.e. 3.5% per semi annual
	Semi annual Coupon Amount	=	$250,000	×	3.5%
		=	$8,750		This will be received 5*2 =10 times
	n	=	5 years i.e. 5 * 2 = 10 semi annuals
	Market rate on similar bonds (r)	=	4% p.a.
		=	2% semi annual
	PVAF(r, n)	=	Present Value Annuity factor at r% for n periods
	Present Value of an Annuity of $1 at 2% for 10 periods	=	8.98259
	PVIF(r, n)	=	Present Value interest factor at r% for n periods
	Present Value of 1 at 2% at n= 10	=	0.82035
	Sale Price of Bond	=	Coupon Amount * PVAF(r,n)	+	Redemption Amount * PVIF(r,n)
		=	$8750 * 8.98259	+	$250000 * 0.82035
		=	$78,598	+	$205,088
		=	$283,685
	Date	Account Titles and Explanation			Debit	Credit
	01/01/2019	Cash			$                                   283,685
		Bonds Payable				$             250,000
		Premium on bonds payable				$               33,685
		(To record sale of bonds on premium)
	Determination of amount of interest expense for the first semiannual interest period :-
	Straight Line method of Bond Amortization:-
	Annual straight-line amortization of the bond premium			=	33685 / 5 years
				=	$6,737
	Semi-Annual straight-line amortization of the bond premium			=	$6737/2
				=	$3,369
	Semi annual Coupon Amount			=	$8,750
Less:	Semi annual amortization of the bond premium			=	$3,369
	Interest expense for the first semiannual interest periodn			=	$5,381
	Date	Account Titles and Explanation			Debit	Credit
	30/06/2019	Interest Expense			$                                       5,381
		Premium on bonds payable			$                                       3,369
		Cash ($250,000 * 7% * 6/12)				$                 8,750
		(To record the payment of interest)
	31/12/2019	Interest Expense			$                                       5,381
		Premium on bonds payable			$                                       3,369
		Cash ($250,000 * 7% * 6/12)				$                 8,750
		(To record the payment of interest)

Feel free to ask any clarification, if required. Please provide feedback by thumbs up, if satisfied. It will be highly appreciated. Thank you.