Answer:
there are no requirements, but I assume that they ask about issuance costs and their amortization:
market price of the bonds:
PV of face value = $5,000,000 / (1 + 10%)²⁰ = $743,218
PV of coupon payments = $400,000 x 8.5136 (PV annuity factor, 10%, 20 periods) = $3,405,440
market price = $4,148,658
Journal entry to record issuance and bond issue costs
January 1, 2013
Dr Cash 4,088,658
Dr Discount on bonds payable 851,342
Dr Bond issue costs 60,000
Cr Bonds payable 5,000,000
amortization of bond discount and issue costs = ($4,088,658 x 10%) - $400,000 = $8,865.80 ≈ $8,866
allocation to bond issue costs = ($60,000 / $911,342) x $8,866 = $583.71 ≈ $584
allocation to bond discount = $8,866 - $584 = $8,282
Journal entry to record first coupon payment
January 1, 2014
Dr Interest expense 408,866
Cr Cash 400,000
Cr Discount on bonds payable 8,282
Cr Bond issue costs 584
