Journal Entries Using the Effective Interest Method
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Calculate the issue price of a $1,500,000 bond issue and prepare the journal entries for the issuance and first years' interest payments (use the effective interest method). Assume the bonds are paid semiannually (June 30 and December 31).
(a) A 12 year, 8 percent bond issue, the market interest rate is 12 percent.
(b) A 12 year, 8 percent bond issue, the market interest rate is 6 percent.
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Solution Summary
This solution details how the issue price of a bond can be computed through the use of Excel and explains how to compose an accompanying journal entry. This is all described in about 235 words. An Excel file is not provided, but the commands that would be needed to compute these values in Excel are explained.
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Face Value of Bond = 1,500,000
Payment amount = (.08*1,500,000)/2 (it is a semi-annual bond)
= 60,000
Number of Periods = 12*2 = 24
In the journal entry I'll use the 'NET method' which gets rid of the premium/discount accounts. This is the most commonly used method by the companies and is easier to understand as well.
(a) First we calculate the ...
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