On May 1, 2014, a $300,000, ten-year, 14% bond was sold to yield 12% plus accrue

Question

On May 1, 2014, a $300,000, ten-year, 14% bond was sold to yield 12% plus accrued interest. The bond was dated January 1, 2014, and interest is paid each January 1 and July 1. Present value data follow 2. PV of Sl PV of an Annuity 6% 7% 12% 14% 10 periods 0.558395 0.508349 0.321973 0.269744 20 periods 0.311805 0.258419 0.103667 0.072762 10 periods 7.360087 7.023582 5.650223 5.216116 20 periods 11.469921 10.594014 7.469444 6.623131 Required: a. Compute the amount of cash received from the sale of the bond. b. Prepare the journal entry to record the sale c. When preparing the journal entry, you recorded a premium or discount. Discuss why

Explanation / Answer

14% 10 YEAR BOND OF $300,000 No of N=Bonds                            300 One Bond (assumed) 1000 Annual Interest Rate 14.0%                140.00 Market rate 12.0% n period 10 getting interest EVERY PERIOD 140 Value of a bond=140*(PVA 1$,12%,10)+1000*(PV 1$,12%,10) Value of Bond=140*5.650223+1000*.321973                         -   Total Value of bonds                        1,113 Issue Price                        1,113 no of Bonds                            300 Total Issue Value                  3,33,901 Total Face vluae of the Issue                  3,00,000 Premium on Face value of the Bonds =333,901-300,000                      33,901 Amortisation at each period of six month=33901/10                        3,390 Bonds Initial Sales Price                  3,33,901 Stated Interest Rate 14% Maturity in year 10 No of Payment per year 1 Market Interest Rate 12% b Record the sale entry Date Account Title Debit Credit May 1, 2014 Cash                  3,33,901 14% Bond            3,33,901 c Premium is booked because market rate (12%) is lesser than the bond rate (14%)

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