Question

24. On January 2, Lincoln Motors, Inc. issued 1,000; $1,000 par value bonds to finance a new showroom. The bonds are 5-year, 6% bonds that pay interest on June 30 and December 31 each year. When issued, investors required 7% interest and the bonds are due December 31, Year 5. Required: 1. Compute the selling price of the bonds. 2. Prepare the entry to record the sale of the bonds. 3. Prepare the journal entries for the first and second interest payments. 4. What is the carrying value of the bonds on January 1, year 2?

Answer 1

	Coupon Rate per period	3%
	Period	10
	Effective/Market rate per period	3.5%
	Bond amount	$1,000,000
							Amortization Schedule
							Period	Cash paid	Interest	Closing bal.
		Period	Cashflows	Present value	Calculation		0	0	$0	$958,417
		1	$30,000	$28,986	(30000/(1+0.035)^1)		1	$30,000	$33,545	$961,962
		2	$30,000	$28,005	(30000/(1+0.035)^2)		2	$30,000	$33,669	$965,630
		3	$30,000	$27,058	(30000/(1+0.035)^3)		3	$30,000	$33,797	$969,427
		4	$30,000	$26,143	(30000/(1+0.035)^4)		4	$30,000	$33,930	$973,357
		5	$30,000	$25,259	(30000/(1+0.035)^5)		5	$30,000	$34,068	$977,425
		6	$30,000	$24,405	(30000/(1+0.035)^6)		6	$30,000	$34,210	$981,635
		7	$30,000	$23,580	(30000/(1+0.035)^7)		7	$30,000	$34,357	$985,992
		8	$30,000	$22,782	(30000/(1+0.035)^8)		8	$30,000	$34,510	$990,502
		9	$30,000	$22,012	(30000/(1+0.035)^9)		9	$30,000	$34,668	$995,169
		10	$1,030,000	$730,186	(1030000/(1+0.035)^10)		10	$1,030,000	$34,831	$0
				$958,417
1	Selling price of bonds = 958,417/1000 = $ 958.417
2	Account titles and explanation	Debit	Credit
	Cash	$958,417
	Discount on bonds payable	$41,583
	Bonds payable		$1,000,000
	(Bonds issued at discount)
3	Interest expense	$33,545
	Discount on bonds payable		$3,545
	Cash		$30,000
	(interest expense booked for first payment)
	Interest expense	$33,669
	Discount on bonds payable		$3,669
	Cash		$30,000
	(interest expense booked for second payment)
4	Carrying amount of bond as on Jan 01, year 2		$965,630	(from the table period 2 end value)

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