On January 1 of this year, Gateway Company issued bonds with a face value of $1 million and a coupon rate of 9 percent. The bonds mature in 10 years and pay interest semiannually every June 30 and December 31. When the bonds were issued, the annual market rate of interest was 8 percent. Record the issuance of the bonds on January 1 of this year

The journal entry is:

Dr Cash 1,067,952

Cr Bond Payable 1,000,000

Cr Premium on Bond 67,952

(to record bond issuance)

Explanation:

As the coupon rate is higher than the annual market rate of interest, the bond is issued at premium (company received more money from selling bond than its face value).

The price of the bond is calculated as:

+ Semiannual coupon: 1,000,000 x 9%/2 = 45,000

+ Discount rate: 9%/2 = 4.5%;

+ Discounting period = 10 years x 2 = 20 years.

=> Bond price = 45,000/4.5% x [1 - 1.045^ (-20) ] + 1,000,000/1.045^20 = 1,067,952

So, the cash receipt from selling the bond is $1,067,952 and is recorded as Debit; The bond payable is recorded at its face value of $1,000,000 Cr; the difference will go into Premium on Bond $Cr 67,952.