Chapter 10, Problem 1PSA

1.

To determine

Bonds issue price.

Explanation of Solution

(a)

Cash flow	Table	Value from table	Amount ($)	Present value ($)
Par value	B.1	0.4564	40,000	18,256
Annuity (Interest)	B.2	13.5903	2,000	27,181
Bond’s issue price				45,437
Premium on bond				5,437

Table (1)

Working notes:

Given,
Bonds par value is $40,000.
Rate of interest is 10%.
Time period is 0.05.

Computation of interest on bond,

$\begin{array}{c}\text{Interest on bond}=\text{Bond}\text{value}\times \text{Rate}\text{of}\text{intrest}\times \text{Time}\text{period}\\ =\text{\$40,000}\times \text{10\%}\times 0.\text{05}\\ =\text{\$2,000}\end{array}$

Hence, interest on bond is $2,000.

(b)

Issue of bonds at premium on January 1, 2017

Date	Account Title and Explanation	Post. Ref.	Debit ($)	Credit ($)
January 1	Cash		45,437
	Premium on bonds payable			5,437
	Bonds payable			40,000
	(To record the sold bonds at pre)

Table (2)

• Cash account is the assets account. Since the cash is received, the value of assets is increased. So, debit the credit the cash account.
• Premium on bonds payable account is the liabilities account. Here, at the time of issue of the bonds premium has been given which increases the liabilities of the company. So, debit the premium on bonds payable account.
• Bonds payable account is the liabilities account. Bonds has been sold, which increases the liabilities of the company. So, credit the bonds payable account.

2.

To determine

Bonds issue price.

Explanation of Solution

(a)

Cash flow	Table	Value from table	Amount ($)	Present value ($)
Par value	B.1	0.3769	40,000	15,076
Annuity (Interest)	B.3	12.4622	2,000	24,924
Bond’s issue price				40,000

Table (3)

Hence, bonds issue price is $40,000.

(b)

Sale of bonds at par on January 1, 2017

Date	Account Title and Explanation	Post. Ref.	Debit ($)	Credit ($)
January 1 2017	Cash		40,000
	Bonds payable			40,000
	(To record the sold bonds at par)

Table (4)

• Cash account is the assets account. Since the cash is received, the value of assets is increased. So, debit the credit the cash account.
• Bonds payable account is the liabilities account. Bonds has been sold, which increases the liabilities of the company. So, credit the bonds payable account.

3.

To determine

Bonds issue price

Explanation of Solution

(a)

Cash flow	Table	Value from table	Amount ($)	Present value ($)
Par value	B.1	0.3118	40,000	12,472
Annuity (Interest)	B.2	11.4699	2,000	22,940
Bond’s issue price				35,412
Discount on bond				4,588

Table (5)

Hence, bonds issue price is $35,412.

(b)

Issue of bonds at discount on January 1, 2017

Date	Account Title and Explanation	Post. Ref.	Debit ($)	Credit ($)
January 1	Cash		35,412
	Discount on bonds payable		4,588
	Bonds payable			40,000
	(To record the sold bonds at discount)

Table (6)

• Cash account is the assets account. Since the cash is received, the value of assets is increased. So, debit the credit the cash account.
• Discount on bonds payable account is the liabilities account. Here, at the time of issue of the bonds discount has been given which decrease the liabilities of the company. So, debit the discount on bonds payable account.
• Bonds payable account is the liabilities account. Bonds has been sold, which increases the liabilities of the company. So, credit the bonds payable account.