A W asked in Business & FinanceInvesting · 9 years ago

Can somebody explain this to me PLEASE?

May 1, 2007 Bonds payable with par value of $700,000, which are dated January 1, 2007, are sold at 106 plus accrued interest. They are coupon bonds, bear interest at 12% (payable annually at January 1), and mature January 1, 2017. (Use interest expense account for accrued interest.)

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  • JKRB
    Lv 7
    9 years ago
    Favorite Answer

    When bonds are issued on other than the interest payment dates, buyers of the bonds will pay the seller the interest accrued from the last interest payment date to the date of issue. This is because the buyers of the bonds are not entitled to the months of interest (in this case 4 months) that they did not hold the bonds. The way it is calculated is:

    700,000 x 12% x 4/12 = $28,000 Interest Expense

    Then there is the bond premium that must be taken into account:

    700,000 x 6% = $42,000 Bond Premium

    So the journal entry on the date of the issue would be:

    Dr Cash 770,000

    Cr Bonds Payable 700,000

    Cr Premium on Bonds Payable 42,000

    Cr Interest Expense 28,000

    Source(s): Accounting Fan
  • Anonymous
    9 years ago

    Accrued coupon = Par x Coupon Rate x Day Count Fraction

    Coupon accrued for 4 months (January 1 to May 1)

    AC = 100 x 12% x 4/12 = 4 per 100 nominal

    Total AC = $700,000 x 4/100 = $28,000

    Total value of Investment = Par x (Clean Price + Accrued Interest)

    TV = $700,000 x (106 + 4) = $770,000

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