Question

Harford Research issues bonds dated january 1, 2017 that pay interest semiannually on june 30 and december 31. The bonds have a $40000 par value and an annual contract rae of 10% and they mature in 10 years. For each of the following three separate situations (a) determine the bonds issue price on january 1, 2017 and (b) prepare the jurnal entry to record their issuance. 1. The market rate at the date of issuance is 8%. 2. The market rate at the date of issuance is 10%. 3. The market rate at the date of issuance is 12%.

Answer 1

Req 1; Issue Price:
At Market rate of 8%:
Present vallue of Interest received semi annually for 20 period at PVF for 20 period at 4%								27180
				($2,000 * Annuity factor of 4% for 20 i.e. 13.59)
Present value of Maturity amount reeived at the end of 10 years								18520
			($40,000 * PVF of 10th year i.e. 0.463)
			Issue price					45700
At market rate of 10%:
When market rate and stated rate is same, the Bonds are issued at Par
Therefore, Issue price is $40,000
At market rate of 12%
Present vallue of Interest received semi annually for 20 period at PVF for 20 period at 6%								22940
				($2,000 * Annuity factor of 6% for 20 i.e. 11.47)
Present value of Maturity amount reeived at the end of 10 years								12880
			($40,000 * PVF of 10th year i.e. 0.322)
			Issue price					35820
Note: Interest payment semi annually is $40,000 *10%*6/12 = $2,000
Interest is discounted at half the rate of market rate given.
Req 2: Journal entries
Case-1 market rate 8%
Cash Account Dr.					45700
	Bonds payable Account					40000
	Premium on Bonds payable					5700
Case-2 Market rate 10%
Cash Account Dr.					40000
	Bonds payable Account					40000
Case-3 Market rate 12%
Cash Account Dr.					35820
Discount on bonds payable Dr.					4180
	Bonds payable					40000