View Share Window Help Ch. 11 Bonds Payable Classwork and Additional Notes-1-ed B ww Chart fed Shape Comment 9 Discount Contract Rate Market Rate Your bonds pay 10% when the market rate is 12%. Investors will not want to buy your bond if they can cam 12% elsewhere. What can you do to get investors to buy your 10% bond? Answer: lower the price You will need to drop the price of your bond so the investors are really getting a 12% return. In other words, you need to drop the price to the present value of the bond using a 12% interest rate. You will need to sell the bond at a discount 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 12% Using Present Value tables we determine that an issue price of $926.395 will effectively make our bonds equal to bonds that pay the market 12% The journal entry to recording the bondi Da 1 2 GENERAL JOURNAL Description Page Post Debit Credit 1 2 3 3 Discount on Bonds Payable is a contra account which reduces the bodh payable account on the balance sheet. The normal balance of Discount on Bonds Payable is a debit For loaning the company $926,395, over the 5 year period the investor will get Principal Interest Payments To Interest Earned $1,000,000 500,000 1,500,000 926,395 $573,605 The Bowing Company will incur $575,600 of interest expense M. Baker Page 4 80 a 13 F4 sty % ^ 6 85 55 F6 8 17 DII F8 69 & 7 8 61 8 = 10 F10