1 (a)
Calculate the selling
1 (a)
Explanation of Solution
Selling price of bond:
Selling price of bond is the sum of present value of interest payments (annuity) and the principal amount (single sum). This is also known as issue price of bond.
Calculate the selling price of bonds:
Cash Flow | PV Factor (a) | Amount (b) | Present Value (a)×(b) |
Par value | 0.4564 | $40,000 | $18,256 |
Interest (annuity) | 13.5903 | (2) $2,000 | $27,181 |
Price of bonds | $45,437 | ||
Bond premium | (7) $5,437 |
Table (1)
Therefore, the selling price of the bond is $45,437.
Note: Refer to Table B.1 from Appendix of textbook for Present value of $ 1 and refer to Table B.3 from Appendix of textbook for Present value of an annuity $ 1.
Working notes:
Calculate the semiannual face interest rate:
Calculate amount of interest payable.
Calculate the value of bond premium:
1 (b)
Prepare
1 (b)
Explanation of Solution
Prepare journal entry to record issuance of bonds where the market rate at the date of issuance is 8%:
Date | Account Titles and Explanation |
Debit ($) |
Credit ($) |
January 01 | Cash | 45,437 | |
Premium on bonds payable (3) | 5,437 | ||
Bonds payable | 40,000 | ||
(To record the sale of bonds on stated issue date.) |
Table (4)
To record the sale of bonds on stated issue date:
- Cash is an asset and it is increased. Therefore cash is debited by $45,437.
- Premium on Bonds Payable is an adjunct liability account and it is increased. So, credit it by 5,437.
- Bonds payable is a liability and it is increased. Therefore credit bonds payable account by $40,000.
2 (a)
Calculate the selling price of bonds where the market rate on the date of issuance is 10%.
2 (a)
Explanation of Solution
Calculate the selling price of bonds:
Cash Flow | PV Factor (a) | Amount (b) | Present Value (a)×(b) |
Par value | 0.3769 | $40,000 | $15,076 |
Interest (annuity) | 12.4622 | (5) $2,000 | $24,924 |
Price of bonds | $40,000 |
Table (2)
Therefore, the selling price of the bond is $40,000.
Note: Refer to Table B.1 from Appendix of textbook for Present value of $ 1 and refer to Table B.3 from Appendix of textbook for Present value of an annuity $ 1.
Working notes:
Calculate the semiannual face interest rate:
Calculate amount of interest payable.
2 (b)
Prepare journal entry to record issuance of bonds where the market rate at the date of issuance is 10%.
2 (b)
Explanation of Solution
Prepare journal entry to record issuance of bonds where the market rate at the date of issuance is 10%:
Date | Account Titles and Explanation |
Debit ($) |
Credit ($) |
January 1 | Cash | 40,000 | |
Bonds payable | 40,000 | ||
(To record the sale of bonds on stated issue date.) |
Table (5)
To record the sale of bonds on stated issue date:
- Cash is an asset and it is increased. Therefore cash is debited by $40,000.
- Bonds payable is a liability and it is increased. Therefore credit bonds payable account by $40,000.
3 (a)
Calculate the selling price of bonds where the market rate on the date of issuance is 12%.
3 (a)
Explanation of Solution
Calculate the selling price of bonds:
Cash Flow | PV Factor (a) | Amount (b) | Present Value (a)×(b) |
Par value | 0.3118 | $40,000 | $12,472 |
Interest (annuity) | 11.4699 | $2,000 | $22,940 |
Price of bonds | $35,412 | ||
Bond discount | (8) $4,588 |
Table (3)
Therefore, the selling price of the bond is $35,412.
Note: Refer to Table B.1 from Appendix of textbook for Present value of $ 1 and refer to Table B.3 from Appendix of textbook for Present value of an annuity $ 1.
Working notes:
Calculate the semiannual face interest rate:
Calculate amount of interest payable.
Calculate the value of bond premium:
(b) 3.
Prepare journal entry to record issuance of bonds where the market rate at the date of issuance is 10%.
(b) 3.
Explanation of Solution
Prepare journal entry to record issuance of bonds where the market rate at the date of issuance is 12%:
Date | Account Titles and Explanation |
Debit ($) |
Credit ($) |
January 1 | Cash | 35,412 | |
Discount on bonds payable (8) | 4,588 | ||
Bonds payable | 40,000 | ||
(To record the sale of bonds on stated issue date.) |
Table (6)
To record the sale of bonds on stated issue date:
- Cash is an asset and it is increased. Therefore cash is debited by $35,412.
- Discount on bonds payable is a contra liability and it is increased. Therefore debit discount on bonds payable by $4,588.
- Bonds payable is a liability and it is increased. Therefore credit bonds payable account by $40,000.
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Chapter 14 Solutions
Principles of Financial Accounting.
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