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Bond Amortization and Valuation

4. On January 1,2009, a company issued and sold a $400,000, 7%, 10-year bond payable, and received proceeds of $396,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The journal entry to record the first interest payment is:

A. Bond Interest Expense 14,000
Cash 14,000
B, Bond Interest Expense 28,000
Cash 28,000
C. Bond Interest Expense 14,200
Cash 14,000
Discount on Bonds Payable 200
D. Bond Interest Expense 13,800
Discount on Bonds Payable 200
Cash 14,000
E. Bond Interest Expense 14,000
Discount on Bonds Payable 200
Cash 14,200

Problem

A company issues bonds with a par value of $800,000 on their issue date. The bonds mature in 5 years and pay 6% annual interest in two semiannual payments. On the issue date, the market rate of interest is 8%. Compute the price of the bonds on their issue date. The following information is taken from present value tables:

Present value of an annuity for 10 periods at 3% 8.5302
Present value of an annuity for 10 periods at 4% 8.1109
Present value of 1 due in 10 periods at 3% 0.7441
Present value of 1 due in 10 periods at 4% 0.6756

Solution Preview

4. The discount on the bond is $400,000 - $396,000, or $4,000. The discount is amortized every 6 months for 10 years, or over 20 periods. Thus, the semi-annual discount amortized is $4,000/20, or $200. The discount is a debit account. (The original entry was Debit Cash 396,000, Debit Discount on Bonds Payable 4,000, Credit ...

Solution Summary

This solution illustrates the journal entry to make to amortize a bond discount and to value a bond using present value tables.

$2.19