Chapter 10, Problem 1AP

(a)

To determine

Calculate the selling price of bonds for the given situations.

Explanation of Solution

1.

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:

$\begin{array}{c}\text{Semiannual face interest rate }=\frac{\text{Face interest rate}}{\text{2}}\\ =\frac{10\%}{2}\\ =5\%\end{array}$ (1)

Calculate amount of interest payable.

$\begin{array}{c}\text{Interest payable }=\text{Face value of bonds }\times \text{ Semiannual}\text{face interest rate}\\ =\$40,000\times \frac{5(1)}{100}\\ =\$2,000\end{array}$ (2)

Calculate the value of bond premium:

$\begin{array}{c}\text{Bond}\text{premium}\text{=}\text{Selling}\text{price}\text{of}\text{bonds}-\text{par}\text{value}\text{of}\text{bonds}\\ \text{=}\text{\$45,437}-\text{\$40,000}\\ \text{=\$5,437}\end{array}$ (3)

2.

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:

$\begin{array}{c}\text{Semiannual face interest rate }=\frac{\text{Face interest rate}}{\text{2}}\\ =\frac{10\%}{2}\\ =5\%\end{array}$ (4)

Calculate amount of interest payable.

$\begin{array}{c}\text{Interest payable }=\text{Face value of bonds }\times \text{ Semiannual}\text{face interest rate}\\ =\$40,000\times \frac{5(4)}{100}\\ =\$2,000\end{array}$ (5)

3.

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:

$\begin{array}{c}\text{Semiannual face interest rate }=\frac{\text{Face interest rate}}{\text{2}}\\ =\frac{10\%}{2}\\ =5\%\end{array}$ (6)

Calculate amount of interest payable.

$\begin{array}{c}\text{Interest payable }=\text{Face value of bonds }\times \text{ Semiannual}\text{face interest rate}\\ =\$40,000\times \frac{5(6)}{100}\\ =\$2,000\end{array}$ (7)

Calculate the value of bond premium:

$\begin{array}{c}\text{Bond}\text{discount}\text{=}\text{par}\text{value}\text{of}\text{bonds}-\text{Selling}\text{price}\text{of}\text{bonds}\\ \text{=}\text{\$40,000}-\text{\$35,412}\\ \text{=\$4,588}\end{array}$ (8)

(b)

To determine

Prepare journal entry to record issuance of bonds for the three situations given.

Explanation of Solution

1.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
2017	Cash	45,437
January 1	Premium on bonds payable (3)		5,437
	Bonds payable		40,000
	(To record the sale of bonds on stated issue date.)

Table (4)

• 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.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
2017	Cash	40,000
January 1	Bonds payable		40,000
	(To record the sale of bonds on stated issue date.)

Table (5)

• 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.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
2017	Cash	35,412
January 1	Discount on bonds payable (8)	4,588
	Bonds payable		40,000
	(To record the sale of bonds on stated issue date.)

Table (6)

• 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 decreased. 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.