Solution:
Given that :
X company issued bonds of 7 percent having face value of $ 200,000.
At the time of issue the market rate of interest is 8 percent.
Life of the bonds = 5 years
And interest is paid annually.
Now computing the issue price of bond:
Issue price of bond = ($ 200,000 x 7%) x PUIFA (8%, 5 periods) + ($ 200,000) x PUIF (8%, 5th period)
= ($ 14,000 x 3.99271) + ($ 200,000 x 0.68058)
= ($ 55,897.94) + ($ 136,116)
= $ 192,014
Journal entry of issuance of bond at the beginning of year 1
Date/ period General journal Debit Credit
Beginning of Cash A/c $192,014
period 1 Discount of bond $ 7986
payable A/C
To bond payable a/c $200,000
Bond amortisating schedule using effective interest rate:
Period Interest expense Interest expense Discount Closing of
paid in advance record book value
Beginning
of period 1 $192,014
Period 1 $14,000 $15361 $ 1361 $193,375
($192,014 x 8%)
Period 2 $14,000 $15470 $1470 $194845
($193,375 x 8%)
Period 3 $14,000 $15588 $ 1588 $196433
($194845 x 8%)
Period 4 $14,000 $15715 $ 1715 $198148
($196433 x 8%)
Period 5 $14,000 $15852 $ 1852 $200000
($198148 x 8%)
