Question

Flagstaff Systems issues bonds dated January 1, 2017, that pay interest semiannually on June 30 and December 31. The bonds have a $90,000 par value and an annual contract rate of 12%, and they mature in five years.

Required
For each of the following three separate situations, (a) determine the bonds’ issue price on January 1,
2017, and (b) prepare the journal entry to record their issuance.
1. The market rate at the date of issuance is 10%.
2. The market rate at the date of issuance is 12%.
3. The market rate at the date of issuance is 14%.

Answer 1

a)

Bond's issue price on January 1, 2017:

1)

Issue price

$ 96,949.56

2)

Issue price

$ 90,000.00

3)

Issue price

$ 83,678.78

Working;

1)

Price of Bond

=

=-pv(rate,nper,pmt,fv)

Where,

=

$ 96,949.56

rate

5%

nper

10

pmt

90000*6%

=

5400

fv

90000

2)

Price of Bond

=

=-pv(rate,nper,pmt,fv)

Where,

=

$ 90,000.00

rate

6%

nper

10

pmt

90000*6%

=

5400

fv

90000

3)

Price of Bond

=

=-pv(rate,nper,pmt,fv)

Where,

=

$ 83,678.78

rate

7%

nper

10

pmt

90000*6%

=

5400

fv

90000

b)

Journal Entries to record their issuance:

1)

Date

Account title and explantion

Debit

Credit

January 1, 2017

Cash

$ 96,949.56

Bonds Payable

$ 90,000.00

Premium on bonds payable

$   6,949.56

(To record issuance of bonds)

2)

Date

Account title and explantion

Debit

Credit

January 1, 2017

Cash

$ 90,000.00

Bonds Payable

$ 90,000.00

(To record issuance of bonds)

3)

Date

Account title and explantion

Debit

Credit

January 1, 2017

Cash

$ 83,678.78

Discount on bonds payable

$   6,321.22

Bonds Payable

$ 90,000.00

(To record issuance of bonds)