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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

Date

Description

Post

Debit

Credit

1

cash

1

2

Discount on bonds payable

2

3

Bonds payable

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

Date

Description

Post

Debit

Credit

1

1

2

2

3

3

4

4

5

5

OR combined

Date

Description

Post

Debit

Credit

1

1

2

2

3

3

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

Date

Description

Post

Debit

Credit

1

1

2

2

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