Question

Ting Utilities is planning to issue bonds with a face value of $2,010,000 and a coupon rate of 10 percent. The bonds mature in 15 years and pay interest semiannually every June 30 and December 31. All of the bonds were sold on January 1 of this year. Ting uses the effective-interest amortization method and does not use a premium account. Assume an annual market rate of interest of 8.5 percent. (FV of $1, PV of $1, FVA of $1, and PVA of $1)

1.&2. Prepare the journal entry to record the issuance of the bonds and the interest payment on June 30 of this year.

(dr cash, cr bonds payable) (dr interest expense, dr bonds payable, cr cash)

3. What bonds payable amount will Ting report on its June 30 balance sheet?

Answer 1

We would first calculate the issue price of bond
Price of bond	Coupon amount*(1-((1+r)^-n)/r) + Face value*(1/(1+r)^n)
Coupon amount	$100,500	2010000*(10%/2)
No of payments (n)	30	15*2
Interest rate (r )	4.25%	8.5%/2
Price of bond	100500*(1-(1.0425^-30)/0.0425) + 2010000*(1/(1.0425^30))
Price of bond	100500*16.77902+ 2010000*0.286892
Price of bond	$2,262,944
Journal entry to record issuance of bonds
General Journal	Debit	Credit
Cash	$2,262,944
Bonds payable		$2,262,944
(To record bonds issued)
Journal entry to record interest payment on June 30
General Journal	Debit	Credit
Interest expense (2262944*4.25%)	$96,175
Bonds payable (100500-96175)	$4,325
Cash		$100,500
(To record interest payment on June 30)
3.
Calculation of bonds payable as on 30th June
Issue price	$2,262,944
Less: Bonds payable amortized	$4,325
Bonds payable, June 30	$2,258,619