Bond Issued at a Premium On January 1, 2003, Buster Corporation issued 100 bonds

Question

Bond Issued at a Premium

On January 1, 2003, Buster Corporation issued 100 bonds with a par value of $ 1,000 each. The stated interest rate on the bond is 10% payable annually on December 31 of each year. The market rate is 8%. The bonds will mature 4 years from the date of issue (December 31, 2006).

(a) Compute the issue price of the bonds on January 1, 2003.

(b) Provide the journal entry to record the issuance of the bonds on January 1, 2003.

(c) Provide the journal entry that Buster should make on December 31, 2003 assuming the effective interest method.

(d) Show how the bond liability and the related accounts will appear on the Balance Sheet of Buster on December 31, 2003.

Bond Issued at a Discount

On January 1, 2003, Master Corporation issued 100 bonds with a par value of $ 1,000 each. The stated interest rate on the bond is 4% payable annually on December 31 of each year. The market rate is 6%. The bonds will mature 4 years from the date of issue (December 31, 2006).

(a) Compute the issue price of the bonds on January 1, 2003.

(b) Provide the journal entry to record the issuance of the bonds on January 1, 2003.

(c) Provide the journal entry that Master should make on December 31, 2003 assuming the effective interest method.

(d) Show how the bond liability and the related accounts will appear on the Balance Sheet of Master on December 31, 2003.

Explanation / Answer

a. Issued100bondsof$1000each 100000 100,000 market rate 8% mature period 4 PV(100,000x0.73503) $73,502.99 $73,502.99 Interest(100,000*10%) 10000 PV of Annuity(10,000*3.3121 $33,121.27 (73,502.99+33,121.27) $106,624.25 106,624.25 Premium of Bonds 6,624.25 Date Cash paid Interest Premium Carring amounts expence of bonds 1/1/2003    -     -    - 106603 1/1/2003 10000 8528 1472 105131 1/2/2004 10000 8410 1590 103541 1/3/2005 10000 8238 1762 101779 1/4/2006 10000 8142 1858 99921         Round off to 100000 b. Jan1 Cash                       106,603              Premium on Bonds Payable   6,603              Bonds Payable                    100,000         (To records the issuance of bonds at premium) c. Jan1   Bonds Interest Expense      8,528           Premium on Bonds Payable1,472                         Cash                                    10,000 (To record the first interest payment and amortization of the premium) d. Premium on Bonds (Liability) Issued100bondsof$1000each 100000 100,000 market rate 8% mature period 4 PV(100,000x0.73503) $73,502.99 $73,502.99 Interest(100,000*10%) 10000 PV of Annuity(10,000*3.3121 $33,121.27 (73,502.99+33,121.27) $106,624.25 106,624.25 Premium of Bonds 6,624.25

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