Question

On January 1, 2019, Amazon issues $100,000 in bonds having a stated rate of 10%. The bonds mature in 2 years (Dec. 31, 2020) and interest is paid each June 30 and December 31. The market rate is 12%.

Answer 1

Answer:

cash                   96,535 debit

discount on BP    3,465 debit

          Bonds Payable          100,000 credit

Explanation:

We need to determinate the price at which the bonds were issued:

Which is the present value of the coupon payment and maturity

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$  

Coupon payment: 100,000 x 10% / 2 = 5,000

time 4  (2 years x 2 payment per year)

rate 0.06  (12% annual / 2 = 6% semiannual)

$5000 \times \frac{1-(1+0.06)^{-4} }{0.06} = PV$  

PV $17,325.5281  

 

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity (face value)   $100,000.00  

time   4.00  

rate  0.06

$\frac{100000}{(1 + 0.06)^{4} } = PV$  

PV   79,209.37  

 

PV c $17,325.5281  

PV m  $79,209.3663  

Total $96,534.8944  

As the bonds are issued below face value there is a discount:

100,000 - 96,535 = 3,465

the entry will recognize the cash procceds and the creation of a liaiblity

we will also use an auxiliar account for the discount on the bonds