Question

In: Accounting

Assume that on April 1, 2016?, Pacific?, Corp., issues 7 percent, 10-year bonds payable with a...

Assume that on April 1, 2016?, Pacific?, Corp., issues 7 percent, 10-year bonds payable with a maturity value of $100,000.

The bonds pay interest on March31 and September 30?, and Pacific amortizes any premium or discount by the? straight-line method. Pacific?'s fiscal? year-end is December 31.

1.	If the market interest rate is 6 percent when Pacific?, Corp., issues its? bonds, will the bonds be priced at? par, at a? premium, or at a? discount? Explain.
2.	If the market interest rate is 10 percent when Pacific?, ?Corp., issues its? bonds, will the bonds be priced at? par, at a? premium, or at a? discount? Explain.
3.	Assume that the issue price of the bonds is $106,000. Journalize the following bonds payable transactions? (round amounts to the nearest? dollar):
	a.	Issuance of the bonds on April 1, 2016
	b.	Payment of interest and amortization of premium on September 30?, 2016
	c.	Accrual of interest and amortization of premium on December 31?, 2016
	d.	Payment of interest and amortization of premium on March 31?, 2017

hey guys, I have a trouble with the above question, could you please helping me with this one?

Thanks!

Expert Solution

Answer 1.

Annual Coupon Rate = 7%
Semiannual Coupon Rate = 3.5%

Annual Interest Rate = 6%
Semiannual Interest Rate = 3%

According to the rule:
If stated rate is higher than the market rate, then the bond are trading at premium
If stated rate is lower than the market rate, then the bond are trading at discount
If stated rate is equal to the market rate, then the bond are trading at par

So, these bonds are trading at premium

Answer 2.

Annual Coupon Rate = 7%
Semiannual Coupon Rate = 3.5%

Annual Interest Rate = 10%
Semiannual Interest Rate = 5%

According to the rule:
If stated rate is higher than the market rate, then the bond are trading at premium
If stated rate is lower than the market rate, then the bond are trading at discount
If stated rate is equal to the market rate, then the bond are trading at par

So, these bonds are trading at discount

Answer 3.

Face Value = $100,000

Semiannual Coupon = 3.50% * $100,000
Semiannual Coupon = $3,500

Issue Price = $106,000

Premium on Issue = Issue Price - Face Value
Premium on Issue = $106,000 - $100,000
Premium on Issue = $6,000

Semiannual Period to Maturity = 20 (10 years)

Semiannual Amortization of Premium = Premium on Issue / Semiannual Period to Maturity
Semiannual Amortization of Premium = $6,000 / 20
Semiannual Amortization of Premium = $300

Semiannual Interest Expense = Semiannual Coupon - Semiannual Amortization of Premium
Semiannual Interest Expense = $3,500 - $300
Semiannual Interest Expense = $3,200

ekkarill92 answered 1 year ago

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