Question

On January 1, a company issues bonds dated January 1 with a par value of $230,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 6% and the bonds are sold for $239,811. The journal entry to record the issuance of the bond is:

Answer 1

Answer:

Debit : Cash $239,811

Credit : Bonds Payable $239,811

Explanation:

Step 1

First, lets determine the price of Bonds at issuance date (1 January). This is because Bonds are issued at their Issue Price not Par Value.

The Price of the Bond is its present value (PV) and this is calculated as :

FV =  $230,000

PMT = ($230,000 x 7 %) ÷ 2 = $8,050

N =  5 x 2 = 10

P/YR = 2

R = 6%

PV =  ?

Thus, the Present Value (PV) of the Bonds is $239,811.

Step 2

The journal entry to record the issuance of the bond is:

Debit : Cash $239,811

Credit : Bonds Payable $239,811