Question

Hartford Research issues bonds dated January 1 that pay interest semiannually on June 30 and December 31. The bonds have a $39,000 par value and an annual contract rate of 8%, and they mature in 10 years.

Required:

Consider each of the following three separate situations.

1. The market rate at the date of issuance is 6%.

(a) Complete the below table to determine the bonds' issue price on January 1.

(b) Prepare the journal entry to record their issuance.

2. The market rate at the date of issuance is 8%.

(a) Complete the below table to determine the bonds' issue price on January 1.

(b) Prepare the journal entry to record their issuance.

3. The market rate at the date of issuance is 10%.

(a) Complete the below table to determine the bonds' issue price on January 1.

(b) Prepare the journal entry to record their issuance.

Answer 1

	Principal				39,000
	interest				1560
	Market interest rate				3%
	periods to maturity				20
	issue price				44,802
1)	Calculation of bond issue price
	Where
	i=	3.00%
	t=	20
	principal		*	PV of $1 at 3% for 20 yrs =
	39,000		*	0.55368		=	21,594
	interest		*	PV of ordinary annuity at 3%=
	1560		*	14.87747		=	23,209
	bond issue price						44,802
	Journal entry
	Date	Account titles & explanations				Debit	Credit
	1-Jan	cash				44,802
		premium on bonds					5,802
		bonds payable					39,000
2)
	Principal				39,000
	interest				1560
	Market interest rate				4%
	periods to maturity				20
	issue price				39,000
2)	Calculation of bond issue price
	Where
	i=	4.00%
	t=	20
	principal		*	PV of $1 at 3% for 20 yrs =
	39,000		*	0.45639		=	17,799
	interest		*	PV of ordinary annuity at 3%=
	1560		*	13.59003		=	21,200
	bond issue price						39,000
	Journal entry
	Date	Account titles & explanations				Debit	Credit
	1-Jan	cash				39,000
		bonds payable					39,000
	Principal				39,000
	interest				1560
	Market interest rate				5%
	periods to maturity				20
	issue price				34,140
3)	Calculation of bond issue price
	Where
	i=	5.00%
	t=	20
	principal		*	PV of $1 at 3% for 20 yrs =
	39,000		*	0.37689		=	14,699
	interest		*	PV of ordinary annuity at 3%=
	1560		*	12.46221		=	19,441
	bond issue price						34,140
	Journal entry
	Date	Account titles & explanations				Debit	Credit
	1-Jan	cash				34,140
		Discount on bonds				4,860
		bonds payable					39,000