Question

On January 1, 2018, Professor's Credit Union (PCU) issued 6%, 20-year bonds payable with face value of $700,000. The bonds pay interest on June 30 and December 31.

Requirement 1: If the market interest rate is 5% when PCU issues it's bonds, will the bonds be priced at face value at a premium, or at a discount? Explain.The 6% bonds issued when the market interest rate is 5% will be priced at ­­_______. They are _______ in this market, so investors pay _______ to acquire them.

Requirement 2: If the market interest rate is 7% when PCU issues its bonds, will the bonds be priced at face value, at a premium, or at a discount? Explain.
The 6% bonds issued when the market interest rate is 7% will be priced at ______. They are ______ in this market, so investors will pay _______ to acquire them.

Requirement 3: The issue rice of the bonds is 96. Journalize the bond transactions. (Assume bonds payable are amortized using the straight-line amortization method. Record debits first, then credits. Select answers to the nearest whole dollar.

a. Journalize the issues of bonds on January 1, 2018
b. Journalize the payment of interest and amortization on June 30, 2018
c. Journalize the payment of interest and amortization on December 31, 2018
d. Retirement of the bond at maturity on December 31, 2037, assuming the last interest payment has already been recorded.

Answer 1

1
The 6% bonds issued when the market interest rate is 5% will be priced at premium. They are attractive in this market, so investors paywill pay more than the maturity value to acquire them.
2
The 6% bonds issued when the market interest rate is 7% will be priced at discount. They are unattractive in this market, so investors will pay less than maturity value to acquire them.
3
Jan-1-18	Cash	672000		=700000*0.96
	Discount on Bonds Payable	28000
	Bonds Payable		700000
Jun-30-18	Interest Expense	21700
	Discount on Bonds Payable		700	=28000/40
	Cash		21000	=700000*6%/2
Dec-31-18	Interest Expense	21700
	Discount on Bonds Payable		700
	Cash		21000
Dec-31-37	Bonds Payable	700000
	Cash		700000