Questions
1. What is the issuing price for bonds A and B respectively? Show your calculations.
2. For bond A, provide the journal entries for
• the issuance of bond, and
• the first three interest payments.
Please write down the date for each journal entry. Show your calculations for interest expense for each period.
To determine the issuing price for bonds A and B, you need to know the relevant information such as the coupon rate, the face value of the bond, and the market interest rate.
1. Calculating the Issuing Price of Bond A:
To calculate the issuing price of Bond A, you can use the present value formula for calculating the price of a bond:
Issuing Price = (Coupon payment x Present Value Factor for Coupon Payments) + (Face value x Present Value Factor for Face Value)
For example, if the coupon rate for Bond A is 5%, the face value is $1,000, and the market interest rate is 6%, you can use the present value factors for coupon payments and face value at a 6% market interest rate to calculate the issuing price.
Present Value Factor for Coupon Payments:
The present value factor for coupon payments can be calculated using the formula:
Coupon Payment / (1 + Market Interest Rate)^n
where n is the number of periods until the coupon payment is due.
Present Value Factor for Face Value:
The present value factor for the face value can be calculated using the formula:
1 / (1 + Market Interest Rate)^n
Using the present value factors, you can calculate the issuing price as follows:
Issuing Price = (Coupon Payment x Present Value Factor for Coupon Payments) + (Face Value x Present Value Factor for Face Value)
2. Calculating the Journal Entries for Bond A:
a. Journal Entry for Issuance of Bond A:
Date: [Date of Issuance]
Debit: Cash (Issuing Price)
Credit: Bonds Payable (Face Value)
b. Journal Entry for First Interest Payment:
Date: [Date of First Interest Payment]
Debit: Bond Interest Expense (Interest Expense for the period)
Credit: Bond Interest Payable (Coupon Payment for the period)
c. Journal Entry for Second Interest Payment:
Date: [Date of Second Interest Payment]
Debit: Bond Interest Expense (Interest Expense for the period)
Credit: Bond Interest Payable (Coupon Payment for the period)
d. Journal Entry for Third Interest Payment:
Date: [Date of Third Interest Payment]
Debit: Bond Interest Expense (Interest Expense for the period)
Credit: Bond Interest Payable (Coupon Payment for the period)
To calculate the interest expense for each period, you can use the formula:
Interest Expense = Carrying Value of the Bond x Market Interest Rate
The carrying value of the bond is the face value of the bond minus any unamortized discount or plus any unamortized premium.
Please note that specific values for the bond, such as the face value, coupon rate, and market interest rate, need to be provided to perform the calculations accurately.