On January 1, a business issues $500,000 face value, 10 year, 10% contract rate bonds dated...

The market interest rate on January 1 is 10%.

The market interest rate on January 1 is 12%.

The market interest rate on January 1 is 8%.

Solutions

Expert Solution

Issue of $500,000 face value , 10 years 10% bonds.

(i) When the market rate on January 1 is 10%.

When the market rate and the coupon rate (stated rate) of interest
are equal the issue price of the bond will be equal to the face value.

The following entry will be recorded.

Date	Account Title	Debit	Credit
Jan.1	Cash	500000
	Bonds Payable		500000

(ii) When the market rate on January 1 is 12%.

When the market rate is higher than the coupon rate (stated rate) of interest
the issue price of the bond will be less than the face value as the investors
are being offered lesser interest rate than the market.
Therefore there will be a discount on the issue of the bond.

Face value of the bond		500000
Coupon rate		10%
Interest payment		semi- annual
Semi annual interest amount (500000 x 10% /2)		25000
Term of the bond		6 years
PV factor for $1 to be received after sixe years @12%		0.506631121

PV factor for annuity of $1 to be received for 12		8.3838
periods (6 years semi annually) @6%

Present value of the face value @12% (500,000 x 0.506631)		253316
Present value of semiannual interest (25,000 x 8.3838)		209595
Issue price of the bond		462911

Entry to record the issue will be

Date	Account Title	Debit	Credit
Jan.20	Cash	462911
	Discount on issue of bond	37089
	Bonds Payable		500000

The discount will be amortized over the term of the bond at each interest payment.

(ii) When the market rate on January 1 is 8%

When the market rate is lower than the coupon rate (stated rate) of interest
the issue price of the bond will be more than the face value as the investors
are being offered higher interest rate than the market.
Therefore there will be a premuim on the issue of the bond.

Face value of the bond		500000
Coupon rate		10%
Interest payment		semi- annual
Semi annual interest amount (500000 x 10% /2)		25000
Term of the bond		6 years
PV factor for $1 to be received after sixe years @8%		0.630169627

PV factor for annuity of $1 to be received for 12		9.385
periods (6 years semi annually) @4%

Present value of the face value @8% (500,000 x 0.63017)		315085
Present value of semiannual interest (25,000 x 9.385)		209595
Issue price of the bond		524680

Entry to record the issue will be

Date	Account Title	Debit	Credit
Jan.20	Cash	524680
	Premium on issue of bond		24680
	Bonds Payable		500000

The premium will be amortized over the term of the bond at each interest payment.

ekkarill92 answered 11 months ago

Next > < Previous

Related Solutions

On January 1, a business issues $500,000 face value, 10 year, 10% contract rate bonds dated...

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...

Stanford issues bonds dated January 1, 2019, with a par value of $500,000. The bonds' annual...

Stanford issues bonds dated January 1, 2019, with a par value of $500,000. The bonds' annual contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The bonds mature in three years. The annual market rate at the date of issuance is 12%, and the bonds are sold for $463,140. 1. What is the amount of the discount on these bonds at issuance? 2. How much total bond interest expense will be recognized over the...

1. A corporation issues $500,000 of 20-year, 7% bonds dated January 1 at 95. The journal...

1. A corporation issues $500,000 of 20-year, 7% bonds dated January 1 at 95. The journal entry to record the issuance will include Group of answer choices a credit to Bonds Payable for $500,000. a credit to Premiums on Bonds Payable for $25,000. a debit to Interest Expense for $25,000. a credit to Discount on Bonds Payable for $25,000. a debit to Cash for $500,000. 2. If the market interest rate for a bond is higher than the stated interest...

On 1 January 2013, Ouyang Inc. issues $1,000,000 face value, 10-year bonds with annual interest rate...

On 1 January 2013, Ouyang Inc. issues $1,000,000 face value, 10-year bonds with annual interest rate of 5% to be paid each year on December 31. The market interest rate is 5.5%. Using the effective interest rate method of amortization, Ouyang Inc. should record when it closes its annual book on Dec 31, 2013 (Round your number to integers): a carrying amount of 962,312 on Dec 31, 2013; an interest expense of 53,088 on Dec 31, 2013; a cash disbursement...

On January 1, 2019 Lightfoot Corporation issues 10%, 5-year bonds with a face value of $275,000...

On January 1, 2019 Lightfoot Corporation issues 10%, 5-year bonds with a face value of $275,000 when the effective interest rate is 9%. Interest is to be paid semiannually on June 30 and December 31. Lightfoot uses the effective interest method to amortize the premium on June 30, 2019. Prepare the journal entry to record the first interest payment on June 30, 2019.

1. On January 1, a company issues bonds dated January 1 with a par value of...

1. On January 1, a company issues bonds dated January 1 with a par value of $260,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 6% and the bonds are sold for $271,091. The journal entry to record the first interest payment using straight-line amortization is: (Rounded to the nearest dollar.) Multiple Choice Debit Bond Interest Expense $10,209; credit Discount on Bonds...

On January 1, a company issues bonds dated January 1 with a par value of $330,000....

On January 1, a company issues bonds dated January 1 with a par value of $330,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 10% and the bonds are sold for $317,254. The journal entry to record the issuance of the bond is: Multiple Choice Debit Cash $317,254; debit Discount on Bonds Payable $12,746; credit Bonds Payable $330,000. Debit Cash $330,000; credit...

On January 1, a company issues bonds dated January 1 with a par value of $380,000....

On January 1, a company issues bonds dated January 1 with a par value of $380,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 6% and the bonds are sold for $396,210. The journal entry to record the issuance of the bond is: Multiple Choice Debit Cash $380,000; debit Premium on Bonds Payable $16,210; credit Bonds Payable $396,210. Debit Cash $396,210; credit...

On January 1, a company issues bonds dated January 1 with a par value of $400,000....

On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal entry to record the issuance of the bond is: a. Debit Cash $383,793; debit Discount on Bonds Payable $16,207; credit Bonds Payable $400,000. b. Debit Bonds Payable $400,000;...

On January 1, a company issues bonds dated January 1 with a par value of $390,000....

On January 1, a company issues bonds dated January 1 with a par value of $390,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $405,830. The journal entry to record the first interest payment using the effective interest method of amortization is: (Rounded to the nearest dollar.) a. Debit Bond Interest Expense 19,133.00; credit Premium...

Subjects