Question

Hartford Research issues bonds dated January 1, 2017, that pay interest semiannually on June 30 and December 31. The bonds have a $21,000 par value and an annual contract rate of 10%, and they mature in 10 years. (Table B.1, Table B.2, Table B.3, and Table B.4) (Use appropriate factor(s) from the tables provided. Round all table values to 4 decimal places, and use the rounded table values in calculations.)

Required:

Consider each of the following three separate situations.

1. The market rate at the date of issuance is 8%.
(a) Complete the below table to determine the bonds' issue price on January 1, 2017.
(b) Prepare the journal entry to record their issuance.
2. The market rate at the date of issuance is 10%.
(a) Complete the below table to determine the bonds' issue price on January 1, 2017.
(b) Prepare the journal entry to record their issuance.
3. The market rate at the date of issuance is 12%.
(a) Complete the below table to determine the bonds' issue price on January 1, 2017.
(b) Prepare the journal entry to record their issuance.

Answer 1

Solution 1:

Computation of bond price (Market rate 8%)
Table values are based on:
n= 10 years, or 20 half years	20
i= 8% , 4% half yearly	4%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.4564	$21,000.00	$9,584
Interest (Annuity) (21000*10%*6/12)	13.5903	$1,050.00	$14,270
Price of bonds			$23,854

Journal Entries - Hartford Research
Date	Particulars	Debit	Credit
01-Jan-17	Cash Dr	$23,854
	To Bond Payable		$21,000
	To Premium on bond payable		$2,854
	(To record bond issue)

Solution 2:

Computation of bond price (Market rate 10%)
Table values are based on:
n= 10 years, or 20 half years	20
i= 10% , 5% half yearly	5%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.3769	$21,000.00	$7,915
Interest (Annuity) (21000*10%*6/12)	12.4622	$1,050.00	$13,085
Price of bonds			$21,000

Journal Entries - Hartford Research
Date	Particulars	Debit	Credit
01-Jan-17	Cash Dr	$21,000
	To Bond Payable		$21,000
	(To record bond issue)

Solution 3:

Computation of bond price (Market rate 12%)
Table values are based on:
n= 10 years, or 20 half years	20
i= 12% ,6% half yearly	6%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.3118	$21,000.00	$6,548
Interest (Annuity) (21000*10%*6/12)	11.4699	$1,050.00	$12,043
Price of bonds			$18,591

Journal Entries - Hartford Research
Date	Particulars	Debit	Credit
01-Jan-17	Cash Dr	$18,591
	Discount on bond payable	$2,409
	To Bond Payable		$21,000
	(To record bond issue)