In: Accounting
Issuance of a Bond at Face Value
On January 1, 2017, Whitefeather Industries issued 1,100, $1,000 face value bonds. The bonds have a(n) 10-year life and pay interest at the rate of 10%. Interest is paid semiannually on July 1 and January 1. The market rate of interest on January 1 was 10%. Use the present value tables that may be found by clicking on the present value table links above. Round your answer to the nearest dollar.
Required:
1. Calculate the issue price of the bonds and record the issuance of the bonds on January 1, 2017. Round your final answer to the nearest dollar.
$fill in the blank 89f43dfeefd100d_1
Feedback
1) Face value of the bonds is the maturity amount of the bonds
as indicated on the face of the bond contract.
2) Face rate of interest is the amount of interest that will be
paid on the bonds as indicated in the bond contract.
3) n = periods, i = annual market rate of interest/periods per
year. Bonds typically pay interest twice a year.
Identify and analyze the effect of the issuance of the bonds on January 1, 2017.
Activity | Financing |
Accounts | Cash Increase, Bonds Payable Increase |
Statement(s) | Balance Sheet only |
Feedback
To determine the issue price of a bond, the present value of the
interest (annuity) and the present value of the principal (lump
sum) must be determined and added together.
The issue price of a bond is always calculated using the market
rate of interest. The face rate of interest (the rate specified on
the bond certificate) determines the amount of interest payments,
but the market rate determines the present value of the payments
and the present value of the principal. So whenever the tables are
used, the market rate is used.
The table values need to be adjusted if the compounding is more
frequent than annually. The number of interest periods will
increase and the interest rate decreases.
A premium or discount represents the difference between the face
value and the issuance price of the bond. A discount is a deduction
to the bonds payable liability and thus is a contra-liability. A
premium is an addition to the bonds payable liability on the
balance sheet.
Identify and analyze the transaction by using the following
steps:
1. Determine activity – operating, investing or financing.
2. Determine accounts affected and the amount of
increases/decreases.
3. Determine the financial statements affected – balance sheet,
income statement.
The accounting equation must balance for each transaction.
How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry"
and leave the amount box blank. If the effect on a financial
statement item is negative, i.e, a decrease, be sure to enter the
answer with a minus sign.
Balance Sheet | Income Statement | |||||||||||||
Stockholders' | Net | |||||||||||||
Assets | = | Liabilities | + | Equity | Revenues | – | Expenses | = | Income | |||||
Cash | fill in the blank 9be313f36fe5f91_2 | Bonds Payable | fill in the blank 9be313f36fe5f91_4 | fill in the blank 9be313f36fe5f91_5 | No Entry | fill in the blank 9be313f36fe5f91_7 | No Entry | fill in the blank 9be313f36fe5f91_9 | fill in the blank 9be313f36fe5f91_10 |
Feedback
Partially correct
2. How would the issue price have been affected
if the market rate of interest had been higher than 10%.
Bonds would be issued at a discount.
Feedback
A premium or discount represents the difference between the face value and the issuance price of the bond. Bonds are issued at a discount when the market rate of interest exceeds the face rate. The discount on the bond equals the face value less issue price. Bonds are issued at a premium when the face rate exceeds the market rate. The premium on the bond equals the issue price less face value.
3. Identify and analyze the effect of the payment of interest on July 1, 2017.
Activity | Operating |
Accounts | Cash Decrease, Interest Expense Increase |
Statement(s) | Balance Sheet and Income Statement |
Feedback
Identify and analyze the transaction by using the following
steps:
1. Determine activity – operating, investing or financing.
2. Determine accounts affected and the amount of
increases/decreases.
3. Determine the financial statements affected – balance sheet,
income statement.
The accounting equation must balance for each transaction.
How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry"
and leave the amount box blank. If the effect on a financial
statement item is negative, i.e, a decrease, be sure to enter the
answer with a minus sign.
Balance Sheet | Income Statement | |||||||||||||
Stockholders' | Net | |||||||||||||
Assets | = | Liabilities | + | Equity | Revenues | – | Expenses | = | Income | |||||
Cash | fill in the blank ee46f1005027040_2 | No Entry | fill in the blank ee46f1005027040_4 | fill in the blank ee46f1005027040_5 | No Entry | fill in the blank ee46f1005027040_7 | Interest Expense | fill in the blank ee46f1005027040_9 | fill in the blank ee46f1005027040_10 |
Feedback
Partially correct
4. Calculate the amount of interest accrued on
December 31, 2017. If required, round your answer to the nearest
dollar.
$fill in the blank 5fff2a0abfb4ff2_1
Answer :
As stated , Interest rate of the bonds is equal to the market interest rate ( 10% ) , The bonds are issued at the face value .
Issue price of the bond = 1100 * $ 1000 = $ 1100000
Journal entry :
Date | Account titles and explanation | Debit($) | Credit($) |
01-01-2017 | Cash | 1100000 | |
To Bonds payable | 1100000 | ||
( To record bonds issued at face value ) |
Issuance of bonds will increase the financing activity by 1100000 in cash flow statement
Bonds payable appear on the liability side of the company's Balance sheet :
Bonds payable are generated when a company issues bonds to generate cash. As a bond issuer, the company is a borrower. As such, the act of issuing the bond creates a liability. Thus, bonds payable appear on the liability side of the company’s balance sheet. Generally, bonds payable fall in the long-term class of liabilities.
( Please post the other parts of the question separately )