On January 1,2015, Bose Company issued bonds with a face value of $600,000. The

Question

On January 1,2015, Bose Company issued bonds with a face value of $600,000. The bonds carry a stated interest of 7% payable each January 1. Instructions a. Prepare the journal entry for the issuance assuming the bonds are issued at 95 b. Prepare the journal entry for the issuance assuming the bonds are issued at 105. On January 1, 2015, Frog Corporation issued $800,000, 8%, 10-year bonds at face value. Interest is payable annually on January 1. Frog Corporation has a calendar year end Instructions Prepare all entries related to the bond issue for 2015 On January 1, 2014, Zappa Enterprises sold 8%, 20-year bonds with a face amount of $1,200,000 for $1,140,000. Interest is payable annually on January 1 Instructions Calculate the carrying value of the bond at December 31, 2014 and 2015

Explanation / Answer

6) a)

Issued price of Bond = (600000/100) *95 = 570000

Face Value of Bond = 600000

Discount on issue of bond = 600000 - 570000 = 30000

Journal:

Cash Dr 570000

Discount on issue of Bond Dr 30000

Bond Payable Cr 600000

6) b)

Issued price of Bond = (600000/100) *105 = 630000

Face Value of Bond = 600000

Premium on issue of bond = 630000 - 600000 = 30000

Journal:

Cash Dr 630000

Bond Payable Cr 600000

Premium on issue of Bond Cr 30000

7)

Face value of Bond = 800000

Annual coupon amount = 800000*8% = 64000

Note : It is assumed that Bond is trading at par i.e. face value and market value of bond is same.

Journal entry for issuance of Bond:

Cash Dr 800000

Bond Payable Cr 800000

Journal entry for payment of annual interest:

Interest Expense Dr 64000

Cash Cr 64000

8)

Face value of Bond = 1200000

Issue price of Bond = 1140000

Firstly, we need to find out the market rate of interest.

Outflow = Inflow

1140000 = 1200000*8%*Present value annuity factor (r,20) + 1200000*Present value interest factor (r,20)

1140000 = 96000*Present value annuity factor (r,20) + 1200000*Present value interest factor (r,20)

Let r be 8.5%, then Right hand side will be 96000*9.463 + 1200000*0.1956 = 908448+234720 = 1143168

Let r be 8.55% then Right hand side will be 96000*9.4289 + 1200000*0.1938 = 905174.40+232560 = 1137734.40

So, r will be 8.5% + [(1143168 - 1140000)/(1143168 - 1137734.40)] * (8.55% - 8.5%)

= 8.5% + (3168/5433.60) * 0.05% = 8.5% + 0.029% = 8.529%

Calculation of Carrying Value of Bond:

Date

Interest Payment

Interest Expense

Amortisation of Bond Discount

Debit balance in Bond Discount

Credit Balance in Bond Payable Account

Carrying Value of Bond

January 1,2014

1200000 – 1140000 = 60000

1200000

1140000

December 31,2014

1200000*8% = 96000

1140000*8.529% = 97230.60

97230.60 – 96000 = 1230.6

60000 - 1230.6 = 58769.40

1200000

1141230.6

December 31,2015

1200000*8% = 96000

1141230.6

*8.529% = 97335.56

97335.56– 96000 = 1335.56

58769.40 - 1335.56= 57433.84

1200000

1142566.16

Date

Interest Payment

Interest Expense

Amortisation of Bond Discount

Debit balance in Bond Discount

Credit Balance in Bond Payable Account

Carrying Value of Bond

January 1,2014

1200000 – 1140000 = 60000

1200000

1140000

December 31,2014

1200000*8% = 96000

1140000*8.529% = 97230.60

97230.60 – 96000 = 1230.6

60000 - 1230.6 = 58769.40

1200000

1141230.6

December 31,2015

1200000*8% = 96000

1141230.6

*8.529% = 97335.56

97335.56– 96000 = 1335.56

58769.40 - 1335.56= 57433.84

1200000

1142566.16

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