Demonstration problem

Solution

a.

Price received:
Present value of principal: $100,000 x 0.04603 (see Appendix, Table A.3, 40 period row, 8% column) $ 4,603
Present value of interest: $7,500 x 11.92461 (see Appendix, Table A.4, 40 period row, 8% column) 89,435
Total $94,038


b.

(A) Interest Payment Date (B) Bond Interest Expense Debit
(E X 0.16 x ½)		 (C) Cash Credit
($100,000 x 0.15 x ½)		 (D) Discount on Bonds Payable Credit
(B - C)		 (E) Carrying Value of Bonds Payable (previous balance in
E + D)
Issued price $94,038
2010/10/31 $7,523 $7,500 $23
2011/4/30 7,525 7,500 25


c.

2010 Apr. 30 Cash 94,038
Discount on bonds payable 5,962
Bonds payable 100,000
Issued $100,000 face value of 20-year, 15% bonds to yield 16%.
Oct. 31 Bond interest expense 7,523
Discount on bonds payable 23
Cash 7,500
Paid semiannual bond interest expense.
Dec. 31 Bond interest expense ($7,525 x (1/3)) 2,508
Discount on bonds payable 8
Bond interest payable ($7,500 x (1/3)) 2,500
To record accrual of two months' interest expense.
2011 Apr. 30 Bond interest payable 2,500
Bond interest expense ($7,525 x (2/3)) 5,017
Discount on bonds payable 17
Cash 7,500
Paid semiannual bond interest expense.