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In: Accounting

Issuance of a Bond at Face Value On January 1, 2017, Whitefeather Industries issued 1,100, $1,000...

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

Solutions

Expert Solution

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 )


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