Answer:
The bond were issued at 641,657.81
issuance entry:
cash 641,657.81 debit
discount on BP 158,341.19 debit
bonds payable 850,000 credit
first interest payment entry:
interest expense 25,666.31 debit
cash 24,000 credit
discount on PB 1,666.31 credit
Explanation:
The bond will be issued at the present value of coupon payment and maturity discounted at market rate:
[tex]C \times \frac{1-(1+r)^{-time} }{rate} = PV\\[/tex]
C 24.000 (800,000 x 6%/2)
time 40 (20 years x 2)
rate 0.04 (market rate 8% / 2)
[tex]24,000 \times \frac{1-(1+0.04)^{-40} }{0.04} = PV\\[/tex]
PV $475,026.5732
[tex]\frac{Maturity}{(1 + rate)^{time} } = PV[/tex]
Maturity 800,000.00
time 40.00
rate 0.04
[tex]\frac{800000}{(1 + 0.04)^{40} } = PV[/tex]
PV 166,631.24
PV c $475,026.5732
PV m $166,631.2357
Total $641,657.8089
Then, it willalcualte interest expense and amortization as follows:
interest expense
641,657.81 x 0.04 = 25,666.31
cash outlay (24,000)
amortization 1,666.31
(this will decrease the value of the discount on BP accounts.)
