Question
The Company issues $1,000,000 5-year bonds with a contract rate of 10% with semi-annual interest payments when the market rate is 8%. Using Present Value
The Company issues $1,000,000 5-year bonds with a contract rate of 10% with semi-annual interest payments when the market rate is 8%. Using Present Value tables we determine that an issue price of $1,081,105 will effectively make our bonds equal to bonds that pay the market 8%.
The journal entry to record issuing the bond is:
GENERAL JOURNAL | Page |
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| Date | Description | Post | Debit | Credit |
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1 |
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| cash |
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2 |
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| Discount on bonds payable |
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3 |
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| Bonds payable |
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| 3 |
The normal balance of Premium on Bonds Payable is a credit.
For Loaning the company $1,081,105, over the 5 year period the investor will get:
Principal $1,000,000
Interest Payments 500,000
Total 1,500,000
Investment 1,081,105
Interest Earned $ 418,895
The Borrowing Company will incur $418,895 of interest expense.
The journal entry to record the interest payment and premium amortization separately is:
GENERAL JOURNAL | Page |
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| Date | Description | Post | Debit | Credit |
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1 |
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2 |
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3 |
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4 |
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5 |
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OR combined
| Date | Description | Post | Debit | Credit |
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1 |
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2 |
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Bond Repayment
At the end of the term (Maturity) checks have to be written to the bond holders for their principal repayment.
GENERAL JOURNAL | Page |
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| Date | Description | Post | Debit | Credit |
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1 |
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| 1 |
2 |
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| 2 |
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