Question

PART-E On 1st January 2020, Trinket Limited issued 9%, 10-year bonds with a face amount of $3,000,000 for $2,880,000. Interest is payable annually on the 1st of January. The bonds were issued for an effective interest rate of 10%. (a) Prepare the entries to record the issuance of the bonds on 1st January 2020, and the first annual interest accrual and amortisation on 31 December 2020 (assuming that the company uses effective-interest amortisation). (b) Bonds are frequently issued at amounts greater or less than face value. Describe how the market interest rate, relative to the contractual interest rate, affects the selling price of bonds.

Answer 1

Solution:

Part (a).

Credit Date Jan. 1, 2020 Accounts Title Cash Dicount on bonds payable Bonds payable (To record issuance of bonds) Debit $ 2,880,000 $ 120,000 $ 3,000,000 $ 288,000 Dec. 31, 2020 Interest Expense ($2,880,000*10%) Interest payable ($3,000,000*9%) Dicount on bonds payable (To record interest accrual and amortisation) $ $ 270,000 18,000

part (b). The market interest rate is the key factor which affects the issue price (selling price ) of bonds. If market interest rate is higher than the contractual rate of bonds (coupon rate), bonds are issued at discount to compensate the interest loss of subscribers of bonds and if market interest rate is lower than the coupon rate, bonds are issued at premium (i.e. Issuing comp. charges premium for higher interest at the time of issuance.

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