Question

0 Requirements hod. 1. If the market interest rate is 7% when ACU issues its bonds, will the bonds be priced at face value, at a premium, or at a discount? Explain. 2. If the market interest rate is 9% when ACU issues its bonds, will the bonds be priced at face value, at a premium, or at a discount? Explain. 3. The issue price of the bonds is 95. Journalize the following bond transactions: a. Issuance of the bonds on January 1, 2018 b. Payment of interest and amortization on June 30, 2018. c. 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

Requirement 1:

Present value of the interest	$170,841
[$8,000 x 21.35507 Present value annuity factor (3.5%, 40 years ]
Present value of the face value	$51,684
[$200,000 x 0.258419 Present value factor (7%, 40 years]
Issue price of the bonds payable	$222,524
Issue price	$222,524
Face value	($200,000)
Premium on bonds payable	$22,524

Requirement 2:

Present value of the interest	$147,213
[$8,000 x 18.40158 Present value annuity factor (4.5%, 40 years ]
Present value of the face value	$38,898
[$200,000 x 0.19449 Present value factor (9%, 40 years]
Issue price of the bonds payable	$186,111
Face value	$200,000
Issue price	($186,111)
Discount on bonds payable	$13,889

Requirement 3:

	Date	Account title and explanation	Debit	Credit
a	Jan 1,2018	Cash [20,000 x 0.95]	$19,000
		Discount on bonds payable	$1,000
		Bonds payable		$20,000
		[To record issuance of bonds payable]
b	June 30,2018	Interest expense	$825
		Discount on bonds payable [1,000/40 payments]		$25
		Cash [20,000 x 8% x (6/12)]		$800
		[To record interest expense and amortization of discount]
c	Dec 31,2018	Interest expense	$825
		Discount on bonds payable [1,000/40 payments]		$25
		Cash [20,000 x 8% x (6/12)]		$800
		[To record interest expense and amortization of discount]
d	Dec 31,2037	Bonds payable	$20,000
		Cash		$20,000
		[To record redemption of bonds]