Issued at par

If the effective interest rate is equals the stated interest rate, then the bond is issued at a par.

This means the selling price will equal the face value!

The annuity payments (defined with "stated interest") will cover the "effective interest" that the bond accrues year-after-year.

This makes the Bonds Payable stay at face value each time we make an annuity payment, since our annuities are covering the exact amount of the interest.

Face Amount$100
Stated Annual Interest Rate10%
Terms3
Interest PaidAnnually
Effective Interest Rate10%

Selling Price

PV of Bond = $100 x 0.75131
PV of Bond = $75.13

Annuity = $100 x 10%
Annuity = $10

PV of Annuities = $10 x 2.48685
PV of Annuities = $24.87

Selling Price = PV of Bond + PV of Annuities
Selling Price = $75.13 + $24.87
Selling Price = $100

Interest Payments

TermBonds Payable (beg.)Effective Interest RateInterest ExpenseAnnuity+/- Bonds PayableBonds Payable (end)
1??????????????????
TermBonds Payable (beg.)Effective Interest RateInterest ExpenseAnnuity+/- Bonds PayableBonds Payable (end)
1$10010%????????????
TermBonds Payable (beg.)Effective Interest RateInterest ExpenseAnnuity+/- Bonds PayableBonds Payable (end)
1$10010%$100 x 10% = $10?????????
TermBonds Payable (beg.)Effective Interest RateInterest ExpenseAnnuity+/- Bonds PayableBonds Payable (end)
1$10010%$100 x 10% = $10$10??????
TermBonds Payable (beg.)Effective Interest RateInterest ExpenseAnnuity+/- Bonds PayableBonds Payable (end)
1$10010%$100 x 10% = $10$10$10 - $10 = +$0???
TermBonds Payable (beg.)Effective Interest RateInterest ExpenseAnnuity+/- Bonds PayableBonds Payable (end)
1$10010%$100 x 10% = $10$10$10 - $10 = +$0$100 + $0 = $100
TermBonds Payable (beg.)Effective Interest RateInterest ExpenseAnnuity+/- Bonds PayableBonds Payable (end)
1$10010%$100 x 10% = $10$10$10 - $10 = +$0$100 + $0 = $100
TransactionDebitCredit
??????
     Cash$10

Credit to Cash because we're paying the $10 annuities each term with cash, and assets (Cash) have a normal debit balance.

TermBonds Payable (beg.)Effective Interest RateInterest ExpenseAnnuity+/- Bonds PayableBonds Payable (end)
1$10010%$100 x 10% = $10$10$10 - $10 = +$0$100 + $0 = $100
TransactionDebitCredit
Interest Expense$10
     Cash$10

Debit to Interest Expense because interest on our bond is a cost of running business, and expenses (Interest Expense) have a normal debit balance.

Maturity

TermBonds Payable (beg.)Effective Interest RateInterest ExpenseAnnuity+/- Bonds PayableBonds Payable (end)
1$10010%$100 x 10% = $10$10$10 - $10 = +$0$100 + $0 = $100
2$10010%$100 x 10% = $10$10$10 - $10 = +$0$100 + $0 = $100
TermBonds Payable (beg.)Effective Interest RateInterest ExpenseAnnuity+/- Bonds PayableBonds Payable (end)
1$10010%$100 x 10% = $10$10$10 - $10 = +$0$100 + $0 = $100
2$10010%$100 x 10% = $10$10$10 - $10 = +$0$100 + $0 = $100
3$10010%$100 x 10% = $10$10$10 - $10 = +$0$100 + $0 = $100
TermBonds Payable (beg.)Effective Interest RateInterest ExpenseAnnuity+/- Bonds PayableBonds Payable (end)
1$10010%$100 x 10% = $10$10$10 - $10 = +$0$100 + $0 = $100
2$10010%$100 x 10% = $10$10$10 - $10 = +$0$100 + $0 = $100
3$10010%$100 x 10% = $10$10$10 - $10 = +$0$100 + $0 = $100
TransactionDebitCredit
Bonds Payable$100
     ??????

Debit to Bonds Payable because after amortization, we're paying off the face value of the bond, and liabilities (Bonds Payable) have a normal credit balance.

TransactionDebitCredit
Bonds Payable$100
     Cash$100

Credit to Cash because we're using $100 in cash to pay off the face amount of the bond, and assets (Cash) have a normal debit balance.

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