Answer and Explanation:
a. The bonds is issued at a discount, since the coupon rate is lower than the interest rate on the market.
b. Par value = $500,000.
Annual coupon = Par value of bonds × Coupon rate
= $500,000 × 4 %
= $20,000
Interest rate = 6%
n = 10
Present value of an annuity 6%, n = 10 = ((1 - ( 1 ÷ 1.06 ) × 10) ÷ 0.06)
= 7.3601
Present value 6%, n = 10 = (1 ÷ 1.06) × 10
= 0.5584
Issue price of the bonds = Annual coupon × Present value of an annuity + Par value of bonds × Present value
= $20,000 × 7.3601 + $500,000 × 0.5584
= $147,202 + $279,200
= $426,402
3.The Journal entry is shown below:-
Cash Dr, 426,402
To Discount on Bonds Payable $73,598
To Bonds Payable $500,000
Being cash is recorded)
4. Interest expense for the year ended December 31, 2010 = Issue price of the bonds × Interest rate
= $426,402 × 7%
= $29,848.14
5. The Journal entry is shown below:-
Interest Expense Dr, 29,848
Discount on Bonds Payable Dr, 9,848
To Cash $20,000
(Being interest expenses is recorded)
6. Over the years the interest rate would rise as the bonds were issued at a discount.
