Bond liability face, accounting, principles, liability

sabina

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.

mnieman

Explain plz.

marsilni

if it is the beginning of the year there is no amortization my friend in this country

kd26gioi

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?

homie

Just plug in the numbers into your calculator and get the PV.

siavosh

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.

Finalnub

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.

Penny-wenny

Cash
Discount on Bond Payable
Bond Payable

If you wanna journalize that bad boy

Bulla564

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).