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Crane issued $370,000 of 5%, 5-year bonds on January 1, 2021. Interest is payable semi-annually. Calculate...

Crane issued $370,000 of 5%, 5-year bonds on January 1, 2021. Interest is payable semi-annually. Calculate the price of the bond: (a) 4%, (b) 5%, and (c) 6%.

Prepare the journal entry to record the issuance of the bond assuming the market rate of interest is: (a) 4%, (b) 5%, and (c) 6%.

Expert Solution

Required (a 4%):

Interest is payable semi-annually, Rate = 2%, N = 10

Price of bond = Interest * PVAF (2%,10) + RV * PVF(2%,10)

= (370,000 * 5% / 2) * 8.98258500592 + 370,000 * 0.82034829982

= 83,089 + 303,529

Price of bond = 386,618.

Required (b 5%):

Interest is payable semi-annually, Rate = 2.5%, N = 10

Price of bond = Interest * PVAF (2.5%,10) + RV * PVF(2.5%,10)

= (370,000 * 5% / 2) * 8.75206393076 + 370,000 * 0.78119840169

= 80,957 + 289,043

Price of bond = 370,000.

Required (c 6%):

Interest is payable semi-annually, Rate = 3%, N = 10

Price of bond = Interest * PVAF (3%,10) + RV * PVF(3%,10)

= (370,000 * 5%) / 2 * 8.5302028365 + 370,000 * 0.74409391486

= 78,904 + 275,315

Price of bond = 354,219.

Journal entries to record the issuance of the bond:

a	Cash	$386,618
	Bonds payable		$370,000
	Premium on bonds payable		$16,618

b	Cash	$370,000
	Bonds payable		$370,000

c	Cash	$354,219
	Discount on bonds payable	$15,781
	Bonds payable		$370,000

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