1. 7% USD100,000 bond is issued for a term of 3 years. Interest is paid semi-annually.

Market interest rate is 7%, 5% and 9%

Record accounting entries for the same in the books of issuer and show disclosures on Balance sheet

Solution:

since, the coupon rate = market interest rate; the bond will sell at PAR
therefore the entries

Particulars Debit Credit

Cash A/c 100,000

To Bonds Payable A/c 100,000

(Bond issued at par)

Interest expense A/c 3,500

To cash A/c 3500
(Interest paid semi-annually i.e. after 6 months of issuance of bond)

Interest expense A/c 3,500

To cash A/c 3,500
(Interest paid semi-annually i.e. for II nd half year)

Similar interest entries for 2 and 3 year

Bond payable A/c 100,000

To Cash A/c 100,000
(Bond redemption on maturity date)
2. Market interest rate is 9%

Solution:

since, the coupon rate < market interest rate; the bond will sell at Discount

therefore the entries

Particulars Debit Credit

Cash A/c 94,842

Discount on issue of bond 5,158
To Bonds Payable A/c 100,000
(Bond issued at discount)
Interest expense A/c 4,268
To cash A/c 3,500
To Discount on issue of bond A/c 768
(Interest paid semi-annually and amortisation of discount on issue of bond)

Interest expense A/c 4,302

To cash A/c 3,500
To Discount on issue of bond A/c 802
(Interest paid semi-annually and amortisation of discount on issue of bond)

Similar interest entries for 2 and 3 year

Bond payable A/c 100,000

To Cash A/c 100,000
(Bond redemption on maturity date)

Representation in B/s
7% USD100,000 bond 100,000
Less discount on issue of bond 5,158 94,842
(at the time of issue of bond)

7% USD100,000 bond 100,000

Less discount on issue of bond 4,390 95,610
(at the end of 6 months period after issue of bond)

3. Market interest rate is 5%

Solution:

since, the coupon rate > market interest rate; the bond will sell at Premium

therefore the entries

Particulars Debit Credit

Cash A/c 105,508

To Bonds Payable A/c 100,000
To Premium on issue of bond 5,508
(Bond issued at discount)

Interest expense A/c 2,638

Premium on issue of bond A/c 862
To cash A/c 3,500
(Interest paid semi-annually and amortisation of premium on issue of bond)

Interest expense A/c 2,616

Premium on issue of bond A/c 884
To cash A/c 3,500
(Interest paid semi-annually and amortisation of premium on issue of bond)

Similar interest entries for 2 and 3 year

Bond payable A/c 100,000

To Cash A/c 100,000
(Bond redemption on maturity date)

Representation in B/s
7% USD100,000 bond 100,000
Add premium on issue of bond 5,508 105,508
(at the time of issue of bond)

7% USD100,000 bond 100,000

Add unamortised premium on issue of b 4,646 104,646
(at the end of 6 months period)

Workings
Present value of bonds

PV at different market interest rate

Period 7% 9% 5%
Payments
1 3500 3381.6 3349.3 3414.6
2 3500 3267.3 3205.1 3331.4
3 3500 3156.8 3067.0 3250.1
4 3500 3050.0 2935.0 3170.8
5 3500 2946.9 2808.6 3093.5
6 3500 2847.3 2687.6 3018.0
6 100000 81350.1 76789.6 86229.7
Present value of bond 100000.0 94842.1 105508.1

Table showing calculations for bond issued at discount and amortisation of discount using effective interest rate method
Period
Bonds Payable Interest Interest cash Amortization of
(beginning of the period) Expense Payment Discount
(market int. rate*op. (coupon rate*Face
o/s balance) value of the bond)
1 94,842 4268 3500 768
 2 95,610 4302 3500 802
3 96,412 4339 3500 839
4 97,251 4376 3500 876
5 98,127 4416 3500 916
6 99,043 4457 3500 957
5158
Table showing calculations for bond issued at premium and amortisation of premium using effective interest rate method
Period
Bonds Payable Interest Interest cash Amortization of
(beginning of the period) Expense Payment premium
1 105508 2638 3500 862
2 104646 2616 3500 884
3 103762 2594 3500 906
4 102856 2571 3500 929
5 101927 2548 3500 952
6 100976 2524 3500 976
5508
t interest rate is 7%, 5% and 9%
OR Interest expense A/c 3500
Profit and loss A/c 768
To cash A/c (cash interest paid) 3500
To Discount on issue of bond A/c 768

Profit and loss A/c 3500

To Interest exp A/c 3500
ffective interest rate method

Bonds payable Discount on issue of bond a/c

(at the end of the period) 0 amortized 5158

95,610 1 768 4390

 96,412 2 802 3588
97,251 3 839 2749
98,127 4 876 1873
99,043 5 916 957
100,000 6 957 0

effective interest rate method

Bonds payable Premium on issue of bond a/c

(at the end of the period) 0 amortized 5508
104646 1 862 4646
103762 2 884 3762
102856 3 906 2856
101927 4 929 1927
100976 5 952 976
100000 6 976 0
issue of bond a/c
n issue of bond a/c
1 An asset which cost Rs 150 has a carrying amount of Rs 100.
Cumulative depreciation for tax purposes is Rs 90 and the tax rate is
25%.

Solution
Financial books
Asset cost 150
Less accumulated depreciation 50 100

Tax books
Asset cost 150
Less accumulated depreciation 90 60

Recognise DTL as under

Difference in the tax base 40
Deffered tax liability (tax rate @25%) 10