Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted. At the beginning of the year, a company issues a $1,000 face value, semiannual coupon, bond with an 8 percent coupon rate maturing in 10 years. The annual market rate of interest at issuance was 12 percent. The initial liability recorded for this bond is closest to: A. $771. B. $774. C. $1,000.
NVM C
Explain plz.
Is answer really C? 1000 recorded as bonds payable, the difference of 229 is placed in a contra liability account and amoritized.
if it is the beginning of the year there is no amortization my friend in this country
I don’t see how C is correct… When bonds are issued they recorded on the balance sheet at the discount price and amortized to face value over the life of the bond through the difference of the coupon and interest expense. Where did you find this question?
I think it should recorded at book value… Since the bond is discount bond as Mkt IR > COupon… the discounted book value is---- the book value is 1000/(1.12^10), which comes to 311.8 Definetly not a C!
Just plug in the numbers into your calculator and get the PV.
A
A - You record the amount received (PV of this bond = 771) since it is a discount bond and that is the initial liability. The difference btwn the amount received and the face value of the bond is recorded in a contra liability account as someone mentioned above, under US GAAP.
A You record the amount received since it is a discount bond and that is the initial liability. Note that the liability will increase as bond discount is amortized over time up to the par value at maturity.
Cash Discount on Bond Payable Bond Payable If you wanna journalize that bad boy
ANSWER A The liability recorded is based on market rates of interest when the bond is issued and not the coupon rate on the bond. The market value of the bond at issuance was $770.60. (FV=1,000, PMT=40, N=20, I=6.0).