Question

On January 1, 2018, Professors Credit Union (PCU) issued 7%, 20-year bonds payable with face value of $100,000. The bonds pay interest on June 30 and December 31. Read the requirements. Requirement 1. If the market interest rate is 5% when PCU issues its bonds, will the bonds be priced at face value, at a premium, or at a discount? Explain. The 7% bonds issued when the market interest rate is 5% will be priced at 7. They are in this market, so investors will pay quire them. a discount a premium face value

Answer 1

1. Since the Market Interest Rate(5%) is lesser than the Interest rate (7%) offered on the bond being issued, the bond will be issued at premium.

2. In this case, Market interest Rate (9%) is greater than the interest rate (7%) offered on the bond, the bond will be issued as discount (ie. <100).

3.

a) Issuance of Bond (1 Jan, 2018)

Bank a/c   Dr. 99,000

Discounts of Bond Dr. 1,000

To Bond payable a/c 100,000

b) Payment of Interest and Amortization (30 June 18)

Interest Expense Dr. 3,500

To Bank/Cash a/c 3,500

Discount on Bond a/c (Expense) Dr. 25 (1000/40)

To Discounts of Bond a/c 25 (1000/40)

c) Same as (b)

d) Bond Payable a/c Dr. 100,000

To Bank/Cash a/c 100,000