Solution to demonstration problem

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) (B) (C) (D) (E)
Interest
Payment
Date
 Bond Interest
Expense Debit
(E x 0.16 x ½)
 Cash credit
($100,000 x
0.15 x ½)
 Discount on
Bonds Payable
Credit (B-C)
 Carrying value of
Bonds Payable
(previous balance in E+D)
Issued Price $94,038
2010/10/31 $7,523 $7,500 $23 94,061
2011/4/30 7,525 7,500 25 94,086

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          

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.