Baker Company issued $200,000 of ten-year bonds to yield 11% when the stated rate of the bonds was 9%.Present value factors are: $\begin{array}{lll}&9\%&11\%\
\text { PVIF of } \$ 1,10 \text { years } & 0.42241 & 0.35218 \
\text { PVIF of Annuity of } \$ 1,10 \text { years } & 6.41766 & 5.88923
\end{array}$
The entry to record the sale would be
A) DR Cash $\quad 176,442$
DR Bond premium$\quad$23,558
CR Bonds payable$\quad$200,000
B) DR Cash$\quad$176,442
DR Bond discount$\quad$23,558
CR Bonds payable$\quad$200,000
C) DR Cash$\quad$223,558
CR Bond premium$\quad$23,558
CR Bonds payable$\quad$200,000
D) DR Cash$\quad$223,558
CR Bond discount $\quad$23,558
CR Bonds payable$\quad$200,000

Question

Quizplus · Accepted Answer

Since the bonds were issued to yield 11% but the stated rate is 9%, they were issued at a discount. The present value of the bond is calculated using the yield rate (11%) for both the lump sum and the annuity. The cash received (DR Cash) is the sum of the present value of the principal (PVIF of $1, 10 years at 11% * $200,000 = $70,436) and the present value of the interest payments (PVIF of Annuity of $1, 10 years at 11% * annual interest payment of $18,000 (9% of $200,000) = $105,998.14), totaling approximately $176,434.14, rounded to $176,442 for simplicity. The difference between the cash received and the face value of the bonds is the bond discount ($200,000 - $176,442 = $23,558).

Baker Company Issued $200,000 of Ten-Year Bonds to Yield 11