Question

1. On January 1, a business issues $500,000 face value, 10 year, 10% contract rate bonds dated January 1. Interest is payable semiannually each June 30 and December 31. Prepare any necessary journal entries on January 1 to issue the bonds under the following independent circumstances. (Please be sure to show your work)

A. The market interest rate on January 1 is 10%.

B. The market interest rate on January 1 is 12%.

C. The market interest rate on January 1 is 8%.

Answer 1

Solution:

Requirement:A

Date	Account Titles and Explanation	Debit	Credit
Jan. 1	Cash	$            500,000
	Bonds Payable		$        500,000
	(To record bond issued at face value )

Notes:

1) If market rate and contract rate are same, then such bonds are issued at face value.

Requirement:B

Date	Account Titles and Explanation	Debit	Credit
Jan. 1	Cash	$   442,650
	Discount on Bands Payable	$     57,350
	Bonds Payable		$ 500,000
	( To record bonds issue)

Working:

Present value of interest payments	$      286,748
[$500,000*5%* 11.46992 PV annuity factor (6%, 10 years, semi-annual bond)]
Present value of the face value	$      155,902
[$500,000 x 0.31180 PV ordinary factor (6%, 10 years)]
Issue price of bond	$      442,650

Requirement:C

Date	Account Titles and Explanation	Debit	Credit
Jan. 1	Cash	$   567,952
	Premium on Bonds Payable		$    67,952
	Bonds Payable		$ 500,000
	( To record bonds issue)

Working:

Present value of interest payments	$ 339,758
[$500,000*5%* 13.59033 PV annuity factor (4%, 10 years, semi-annual bond)]
Present value of the face value	$ 228,193
[$500,000 x 0.45639 PV ordinary factor (4%, 10 years)]
Issue price of bond	$ 567,952