Chapter 10, Problem 1PSB

1.

To determine

Bonds issue price.

Explanation of Solution

(a)

Cash flow	Table	Value from table	Amount ($)	Present value ($)
Par value	B.1	0.6139	90,000	55,251
Annuity (Interest)	B.3	7.7217	5,400	41,697
Bond’s issue price				96,948
Premium on bond				6,948

Table (1)

Working notes:

Given,
Bonds par value is $90,000.
Rate of interest is 12%.
Time period is 0.05.

Compute the interest on bond,

$\begin{array}{c}\text{Interest on bond}=\text{Bond}\text{value}\times \text{Rate}\text{of}\text{intrest}\times \text{Time}\text{period}\\ =\text{\$90,000}\times \text{12\%}\times 0.\text{05}\\ =\text{\$5,400}\end{array}$

Hence, interest on bond is $5,400.

(b)

Issue of bonds at premium on January 1, 2017

Date	Account Title and Explanation	Post. Ref.	Debit ($)	Credit ($)
January 1	Cash		96,948
	Premium on bonds payable			6,948
	Bonds payable			90,000
	(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	0.5584	90,000	50,255
Annuity (Interest)	B.3	7.3601	5,400	39,745
Bond’s issue price				90,000

Table (3)

Hence, bonds issue price is $90,000.

(b)

Sale of bonds at par on January 1, 2017

Date	Account Title and Explanation	Post. Ref.	Debit ($)	Credit ($)
January 1 2017	Cash		90,000
	Bonds payable			90,000
	(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	0.5083	90,000	45,747
Annuity (Interest)	B.3	7.0236	5,400	37,927
Bond’s issue price				83,674
Discount on bond				6,326

Table (5)

Hence, bonds issue price is $83,674.

(b)

Issue of bonds at discount on January 1, 2017

Date	Account Title and Explanation	Post. Ref.	Debit ($)	Credit ($)
January 1	Cash		83,674
	Discount on bonds payable		6,326
	Bonds payable			90,000
	(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.