Question

Hartford Research issues bonds dated January 1, 2017, that pay interest semiannually on June 30 and December
31. The bonds have a $40,000 par value and an annual contract rate of 10%, and they mature in 10 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 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

Requirement 1

Assuming marker rate is 8%

Date	Description	Debit	Credit
jan 01 2017	Cash	$ 45,436
	Premium on bonds Payable		$ 5,436
	Bonds payable		$ 40,000
	(Issue of bonds )

Working

Bonds issue price is calculated by ADDING the:
Discounted face value of bonds payable at market rate of interest, and
Discounted Interest payments amount (during the lifetime) at market rate of interest.

	Annual Rate	Applicable rate		Face Value	$     40,000.00
Market Rate	8.00%	4.00%		Term (in years)	10
Coupon Rate	10.00%	5.00%		Total no. of interest payments	20

Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$            40,000	at	4.00%	Interest rate for	20	term payments
PV of $1	0.45639
PV of	$            40,000	=	$             40,000	x	0.45639	=	$ 18,255	A
Interest payable per term	at	5.000%	on	$   40,000
Interest payable per term	$         2,000.00
PVAF of 1$	for	4.0%	Interest rate for	20	term payments
PVAF of 1$	13.59033
PV of Interest payments	=	$          2,000.00	x	13.59033	=		$ 27,181	B
				Bond Value (A+B)			$ 45,436

Assuming Market interest rate is 10%

Bond will be issued at Par when market rate and bond cou[on rate is same. Issue price =$40,000

Date	Description	Debit	Credit
jan 01 2017	Cash	$ 40,000
	Bonds payable		$ 40,000
	(Issue of bonds )

Assuming Market interest rate is 12%

Date	Description	Debit	Credit
jan 01 2017	Cash	$ 35,412
	Discount on bonds Payable	$ 4,588
	Bonds payable		$ 40000
	(Issue of bonds )

	Annual Rate	Applicable rate		Face Value	$     40,000.00
Market Rate	12.00%	6.00%		Term (in years)	10
Coupon Rate	10.00%	5.00%		Total no. of interest payments	20

Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$            40,000	at	6.00%	Interest rate for	20	term payments
PV of $1	0.31180
PV of	$            40,000	=	$             40,000	x	0.31180	=	$ 12,472	A
Interest payable per term	at	5.000%	on	$   40,000
Interest payable per term	$         2,000.00
PVAF of 1$	for	6.0%	Interest rate for	20	term payments
PVAF of 1$	11.46992
PV of Interest payments	=	$          2,000.00	x	11.46992	=		$ 22,940	B
				Bond Value (A+B)			$ 35,412