question archive On 1/1/20X1, Illini issues 10% bonds dated 1/1/20X1, with a face amount of $60,000
On 1/1/20X1, Illini issues 10% bonds dated 1/1/20X1, with a face amount of $60,000
Subject:FinancePrice:2.87 Bought7
On 1/1/20X1, Illini issues 10% bonds dated 1/1/20X1, with a face amount of $60,000. The bonds mature on 12/31/20X4 (4 years). For bonds of similar risk and maturity, the market yield is 8%. Interest is paid semiannually on June 30 and December 31. Illini incurs a total of $2,000 debt issuance costs. After its third interest payment on 6/30/20X2, Illini buys back the bonds on the market for $61,000.
Please refer to the instructions and the table in this question. Enter the correct journal entry for part [A].
DateAccount Name (Debit)Account Name (Credit)DebitCredit1/1/20X1Cash[A]
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Answer:
Face value = $60,000
Coupon payment = $60,000 * 10% * 6/12 = $3,000
Years to maturity = 4
Market yield semiannual = 8%/2 = 4%
Price of bond = Present value of coupon payments + Present value of maturity amount
= ($3,000 * Present value annuity factor 4% 8 payments) + ($60,000 * Present value factor 4% 8 payment)
= ($3,000 * 6.73274) + ($60,000 * 0.73069)
= $64,039.62
Correct Journal entry for Part A is as follows:-
Step-by-step explanation
Date Account Titles Debit Credit
1/1/20X1 Cash $64,039.62
Bonds payable $60,000.00
Premium on bonds payable $4,039.62
(Recording issue of bonds)
