Jules issues 4.5%, five-year bonds dated January 1, 2009, with a $230,000 par value. The bonds...

Jules issues 4.5%, five-year bonds dated January 1, 2009, with a $230,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $235,160. The annual market rate is 4% on the issue date.

Is this bond trading at a discount or premium? Why? What does it mean to amortize a discount or premium?

Solutions

Expert Solution

Answer :

1. Bond is trading at Premium of $ 35,160.

Premium is the value collected from the bond above the face value at the time of issue of the bond.

IF the Bond interest rate is More than the market interest rate.bond will be issued at a premium.

Face Value of the bond is $200,000 Issue Value is $ 235,160

Premium is = $235,160- $200,000 =$35,160 ( Premium)

2. Amortize a discount or Premium.

It is the process of allocating the discount or premium on bonds payables from the interest expenses and Bond costs from the bond over the lifetime of the bond.

The Main objective of the bond is the reduce the Premium and discount amount to Zero by the End of the life of the bond.

The Difference between the Bond interest expenses ( Which is Calculated on the carrying value of the bond with market interest rates.) and Cash interest paid ( On FAce value with Bond Interest rate)) is used to amortize the Discount and premium amount on bonds payable over the life.

ekkarill92 answered 1 year ago

Next > < Previous

Related Solutions

Ellis issues 7.0%, five-year bonds dated January 1, 2017, with a $510,000 par value. The bonds...

Ellis issues 7.0%, five-year bonds dated January 1, 2017, with a $510,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $531,752. The annual market rate is 6% on the issue date. Required: 1. Complete the below table to calculate the total bond interest expense over the bonds' life. 2. Prepare a straight-line amortization table for the bonds’ life. 3. Prepare the journal entries to record the first two interest...

Ellis issues 6.5%, five-year bonds dated january 1, 2015, with a $250,000 par value. The bonds...

Ellis issues 6.5%, five-year bonds dated january 1, 2015, with a $250,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $255,333. The annual market rate is 6% on the issue date. 1.calculate the total bond interest expense over the bond life 2. Prepare a straight-line amortization table like exhibit 14.11 for the bonds' life. 3. Prepare the journal entries to record the first two interest payments.

Ellis issues 9.0%, five-year bonds dated January 1, 2016, with a $550,000 par value. The bonds...

Ellis issues 9.0%, five-year bonds dated January 1, 2016, with a $550,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $572,305. The annual market rate is 8% on the issue date. Required: 1. Complete the below table to calculate the total bond interest expense over the bonds' life. 2. Prepare a straight-line amortization table for the bonds’ life. 3. Prepare the journal entries to record the first two interest...

Ellis issues 7.0%, five-year bonds dated January 1, 2017, with a $580,000 par value. The bonds...

Ellis issues 7.0%, five-year bonds dated January 1, 2017, with a $580,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $604,738. The annual market rate is 6% on the issue date. Required: 1. Complete the below table to calculate the total bond interest expense over the bonds' life. 2. Prepare a straight-line amortization table for the bonds’ life. 3. Prepare the journal entries to record the first two interest...

Ellis Company issues 9.0%, five-year bonds dated January 1, 2019, with a $480,000 par value. The...

Ellis Company issues 9.0%, five-year bonds dated January 1, 2019, with a $480,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $499,483. The annual market rate is 8% on the issue date. Required: 1. Compute the total bond interest expense over the bonds' life. 2. Prepare an effective interest amortization table for the bonds’ life. 3. Prepare the journal entries to record the first two interest payments.

Ripkin Company issues 9%, five-year bonds dated January 1, 2017, with a $320,000 par value. The...

Ripkin Company issues 9%, five-year bonds dated January 1, 2017, with a $320,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $332,988. Their annual market rate is 8% on the issue date. Required 1. Calculate the total bond interest expense over the bonds’ life. 2. Prepare a straight-line amortization table like Exhibit 14.11 for the bonds’ life. 3. Prepare the journal entries to record the first two interest payments

Ellis Company issues 8.5%, five-year bonds dated January 1, 2019, with a $420,000 par value. The...

Ellis Company issues 8.5%, five-year bonds dated January 1, 2019, with a $420,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $464,786. The annual market rate is 6% on the issue date. Required: 1. Compute the total bond interest expense over the bonds' life. 2. Prepare an effective interest amortization table for the bonds’ life. 3. Prepare the journal entries to record the first two interest payments. Complete this...

Ellis Company issues 8.0%, five-year bonds dated January 1, 2019, with a $600,000 par value. The...

Ellis Company issues 8.0%, five-year bonds dated January 1, 2019, with a $600,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $651,181. The annual market rate is 6% on the issue date. Required: 1. Complete the below table to calculate the total bond interest expense over the bonds' life. 2. Prepare a straight-line amortization table for the bonds’ life. 3. Prepare the journal entries to record the first two...

1. On January 1, a company issues bonds dated January 1 with a par value of...

1. On January 1, a company issues bonds dated January 1 with a par value of $260,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 6% and the bonds are sold for $271,091. The journal entry to record the first interest payment using straight-line amortization is: (Rounded to the nearest dollar.) Multiple Choice Debit Bond Interest Expense $10,209; credit Discount on Bonds...

On January 1, a company issues bonds dated January 1 with a par value of $330,000....

On January 1, a company issues bonds dated January 1 with a par value of $330,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 10% and the bonds are sold for $317,254. The journal entry to record the issuance of the bond is: Multiple Choice Debit Cash $317,254; debit Discount on Bonds Payable $12,746; credit Bonds Payable $330,000. Debit Cash $330,000; credit...

Subjects