Lx Business 224 Financial AccountingNison Examination 4 Problems (show work when
ID: 2596590 • Letter: L
Question
Lx Business 224 Financial AccountingNison Examination 4 Problems (show work when helpful for partial credit) . Grand Company authorized s300,000 of 10-year bonds dated Jamuary 1, 20017. The stated rate of interest was 8%, payable semi-annually. The bonds were 1, 2017, when the market interest rate was 6% (10 points) issued on Jamuary a. Calcul ate the amount that was received when the bonds were issued. b. Prepare the journal entry for the issuance of the bonds c. Prepare the journal entry for the first interest payment.Explanation / Answer
1. Formula for calculating bond price is = C x Fx [1- (1+r)-t]/r + [F/(1+r)t]
Where, C = Coupon rate of the bond = 8%/2 = 4% or 0.04 (Semi-annual rate)
r = Interest rate at the market = 6%/2 = 3% or 0.03 (Semi-annual rate)
F = Face value of the bond = $ 300,000
t = time period for over the term of the bond = Ten years semi-annually = 10*2 = 20
So, Bond price = 0.04 x 300,000 x 1- (1+ 0.03)-20 + 300,000 0.03 (1+0.03)20
= 12000 x [{1 - ( 1/1.806)} / 0.03] + ( 300,000 / 1.806)
= 12000 x [( 1-0.5537 ) / 0.03 + 166102.73
= 12000 x 14.48 + 166102.73
= $ 344,632.42
2. Journal Entry for issuance of bond on Jan 01, 2017
Cash Dr. $ 344,632
Bonds payable Cr. $ 300,000
Premium on Bonds payable Cr. $ 44,632
( Issuance of 8% bonds on premium)
3. Journal entry of first interest payment on June 30, 2017
Premeium on Bonds payable (44,632/20) Dr. 2232
Interest Expense ( 12,000-2232) Dr. 9,768
Cash [( 300,000 * 8%)/2] Cr. $ 12,000
( first semi-annual interest paid and premium on Bonds written off)
** The premium on Bonds payable is to be written off over the term of the Bond i.e., 20 periods equally.
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