Free solved Is this bond being issued at per value, at a discount, or at a premium.


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It is asked in first question of the first page Is this bond being issued at per value, at a discount, or at a premium.

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Step 1 of 3

In the question, the par value of bond is given for 60000, contracted interest rate is 10%, market interest rate 7% and issue price is 103.

And based on the given information, the asked questions are be answered.

Explanation:

The asked questions are to be answered on the basis of given information that consist the par value of bond for 60000,contracted interest rate for 10% and market interest rate is 7%.

 

 

Step 2 of 3

The questions are answered as following –

1) The bond is being issued at a Premium because the issue price is given for 103 that is greater than the par value (100).

2) If the bond pays interest semi-annually and has a term of 6 years, there will be 6×2=12 total interest payments.

 

3) The amount of each interest payment can be calculated using the Contract Interest Rate. For semi-annual payments, it would be

 

interest=ParValue×Contract Interest Rate×612

contract interest rate=10%

Parvalue=60,000

interest=60,000×10100×612).

Interest=3,000

4) The cash received when the bond is issued is the issue price per bond multiplied by the number of bonds issued. In this case –

issue price = 103

Par value = 60,000

Cash received =Par value×issue price

Cash received = 60,000×103

Cash received = 6,180,000

5) The Premium is the difference between the issue price and the par value:

Premium=(103−100)

issue price = 103

par value = 100

Premium=(103−100)

Premium=3

6) The amortization with each interest payment is the total premium amortization divided by the number of payments:

312

As the number of payment is computed above is equal to 12.

The amortization with each interest payment =312

The amortization with each interest payment = 0.25

 

Explanation:

2 )Since the bond pays interest semi- annually and has term of 6 yeas so there will be 12 total interest payment.3)The amount of interest payment is calculated by multiplying the par value and contract interest rate and divide the outcome by number of payment per year. 4) When the bond is issued, the issue price per bond is multiplied by the number of bond issued, to get the total amount received .5) Premium is the difference between the issue price and the par value. 6) The amortization with each interest payment is calculated by dividing the premium by the number of payment computed.

 

 

 

Step 3 of 3

7) The interest expenses booked each time is the semi annual interest payment plus the amortization amount :

computed interest payment =3,000

The amortization = 0.25

Interest expenses = 3,000+0.25

Interest expenses =3,000.25

8) Journal entry at issuance is as follows –

Date Account Dr Cr
Cash A/c $61,800
To Bond payable A/c $60,000
To premium on bond payable A/c $1,800
(Being issuance is recorded by debiting cash for issue price and credited bond payable for the Par value)

9) Journal for Semi annual interest Payment:

Date Account Dr Cr
Interest expenses A/c $3,000.25
To cash A/c $3,000
To Premium on Bond payable A/c $0.25
( Being semi -annual interest payment is recorded)

 

Date Account Dr Cr
Bond payable A/c $60,000
Premium A/c $1.5
To Cash A/c $60,001.5
(Being entry of retirement is recorded)

Working Note –

Remaining premium to be amortized after the 6th interest payment:

Remaining premium = Total premium−Amortized premium

Remaining premium =3−(0.25×6)

Remaining premium = 3−1.5=1.5

Total cash received at retirement:

Total cash = Par value+Remaining premium

Total cash =60,000+1.5=60,001.5

Explanation:

7)Interest expenses is computed by adding the amount of interest payment and amortization. 8) The journal entry at issuance involved recording the cash received and creating a liability for the bond issued. 9)The journal entry for the semiannual interest payment included debiting the interest expense, crediting the cash paid, and adjusting the premium amortization. 10)The journal entry at retirement involved debiting the bond payable and premium on bonds accounts, and crediting the cash paid for retirement.

Final solution

1) The bond is issued at premium.

2) If the bond pays interest semi-annually and has a term of 6 years, it will be 6×2=12total interest payments.

3) The amount of each interest payment = 3,000

4) Cash received is the issue price number of bonds issued =61,80,000

5) The Premium is the difference between the issue price and the par value: 3

6) Amortization per payment = 0.25

7 ) interest expenses = 3,000.25

8) The journal entry at issuance involved recording the cash received and creating a liability for the bond issued. 9)The journal entry for the semiannual interest payment included debiting the interest expense, crediting the cash paid, and adjusting the premium amortization.

10) )The journal entry at retirement involved debiting the bond payable and premium on bonds accounts, and crediting the cash paid for retirement.

 

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