Question

1. Assuming that Peach Tree Software sold bonds with a face value of $100,000 for $104,000. Was the market interest rate equal to, less than or greater than the bond’s contractual interest rate? Explain. Include in your answer whether these bonds are sold at premium, discount or face value.

2. Assuming that Peach Tree Software sold bonds with a face value of $100,000 for $96,000. Was the market interest rate equal to, less than or greater than the bond’s contractual interest rate? Explain.

Include in your answer whether these bonds are sold at premium, discount or face value.

3. If the bond payable account has a balance of $700,000 and the bonds payable has a net carrying value of $664,000, what is the amount of bond discount or bond premium? Was this bond originally sold at a premium, discount or face value?

Answer 1

Part 1 --- When bonds are issued higher than its face value, it means the market interest rate is less than the coupon rate. In other words when company is offering higher coupon rate that market interest rate the investors are willing to earn more profit than market that is the reason they are ready to invest or purchase bonds at higher price. Since the bonds are sold for $104,000 which is higher than its face value, the market interest rate is less than contractual or coupon interest rate.

The bonds are sold at Premium.

Bonds are issued at higher price than face value,

2) When bonds are issued at price less than face value, the bonds are issued at discount.

When market interest rate is higher than coupon or contractual rate the bonds are issued at discount. The reason behind this the investors can easily earn more profit from market so why they invest in bonds. To attract the investors the company will issue bonds at discount.

3)

Net Carrying Value of the bonds are less than the Bonds Payable Account balance.

It means bonds were issued at discount. Discount declines and carrying value of bonds increases as maturity approaches.

The amount of Bond Discount = Face Value $700,000 - Carrying Value of Bonds $664,000 = $36,000

The bonds was originally sold at DISCOUNT.