Chapter 14, Problem 16E

Sub Part-1

To determine

Issue price of Bonds:

The Bonds issuance shall be done at the price which is equal to present values of all the cash outflows to be discounted at market rate of interest. For the issuing company, there are two outflows over the lifetime off the bonds i.e. interest payments at stated rate over the lifetime at regular intervals and the repayment of par value of bonds at the end of maturity period. The Issue price of the bonds shall be taken as the sum total of present values of all outflows discounted at the market rate of interest.

Bonds Issuance:

The bonds issuance by the company is a source of long term financing and is issued at a discount or premium depending the prevailing market rate of interest and stated rate of interest on bonds. When the stated rate of interest is higher than the market rate of interest, then the investors will be ready to invest only in the situation when the bonds are issued at premium. This premium on bonds issue shall be treated as income by deducting the amortized portion from the cash interest paid to arrive at the interest expense of the period.When the market rate of interest is higher than stated rate of interest, then the bonds shall be issued at discount, which shall be kept as unamortized expenses in balance sheet to be amortized as an expenses over the period of bonds.

However, when the market rate of interest is equal to stated rate of interest then the bonds are issued at par value.

The determination of issue price of bonds when the market rate of interest is 8%.

Sub Part-2

To determine

The Journal entry for the issuance of bonds.