On June 1 2016 Raiders Universal issued 8 bonds dated June

On June 1 , 2016, Raiders Universal issued 8% bonds dated June 1, 2016, with a face amount of $400,000. The bonds mature on June 1, 2020 (4 years). For bonds of similar risk and maturity, the market yield is 6%. Interest is paid semiannually on June 1 and December 1. Required 1. Determine the price of the bonds at June 1, 2016. 2. Prepare the journal entry to record their issuance by Raiders on June 1, 2016. 3. Prepare the journal entry to record interest on December 1, 2016, using the effective interest method.

Solution

Req 1: Maturity value of bonds 400000 Stated rate of interest 8% Market rate of intererst 6% Semi annual interest (400000*8%*6/12) 16,000 Annuity Factor for Period8 at 5% 7.0197 Present value Factor of Priod -8 0.7894 Present value of interest 112315 Present value of maturity value 315760 Issue price 428075 Req 2: Jjournal entry for issuance: Cash account Account Dr. 428075        Bonds payable Account 400000        Premium on Bonds payable (428075-400000) 28075 req 3: Interest Expense Account dr.(428075*3%) 12842 Premium on Bonds payable 3158       Cash account 16000