Question

Virginia Vista Company has 12%, 10-year bonds payable that mature on June 30, 2028. The bonds are issued on June 30, 2018, and Virginia Vista pays interest each June 30 and December 31 Read the requirements Requirement 1. Wil the bonds be issued at face value, at a premium, or at a discount if the market interest rate on the date of issuance is 10%? If the market interest rate is 13%? If the market interest rate is 10%, the bonds will be issued at If the market interest rate is 13%, the bonds will be issued at Requirement 2. Virginia Vista issued $200,000 of the bonds at 92,5. Round al calculations to the nearest dollar a. Record issuance of the bonds on June 30, 2018. (Record debits first, then credits. Select explanations on the last line of the joumal entry. Round your answers to the nearest whole dolar) Accounts and Explanation Debit Credit 2018 (a) Jun 30 Date b. Record the payment of interest and amortization of the discount on December 31, 2018. Use the straight-line amortization method. (Record debits first, then credits. Select explanations on the last to the nearest whole dollar) Accounts and Explanation Debit Credit Date 2018 (b) Dec 31 Choose from any list or enter any number in the input fields and then continue to the next question

Answer 1

Ans 1 The effective interest rate is also called as market rate. It is the investor's yield maturity. When the effective interest/market rate is higher/lower as compared bond coupon rate then, the bonds were issued at a discount/premium. If the market interest rate is 10%, the bonds will be issued at Premium, since the market interest rate is lower than the coupon rate If the market interest rate is 13%, the bonds will be issued at Discount, since the market interest rate is higher than the coupon rate Ans 2 In straight line amortization, the premium received or discount given on issue of bond is amortized over the bond period maturity on straight line basis. Formula is (Discount / Premium Amount) divided by bond period. Date Accounts and Explanation Debit Credit 2018 (a) June, 30 Cash $1,85,000 [$200000/100*92.5] Disocunt on Bond Payable $15,000 Bond Payable $2,00,000 (To record issue of bond) (b) Dec, 31 Interest Expense $12,750 Disocunt on Bond Payable $750 ($15000/20] Cash $12,000 [($200000 x 12%)/2] (To record interest payment and discount amortisation) (c) Carrying Amount at December 31, 2018 Bond Payable Less: Discount on Bond Payable $2,00,000 $14,250 $1,85,750 Accounts and Explanation Debit Credit (d) Date 2019 June, 30 Interest Expense $12,750 Disocunt on Bond Payable Cash (To record interest payment and discount amortisation) $750 ($15000/20] $12,000 [($200000 x 12%)/2]