Question

Sunland issued $320,000 of 5%, 5-year bonds on January 1, 2021. Interest is payable semi-annually.

Calculate the price of the bond: (a) 4%, (b) 5%, and (c) 6%. (For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round final answer to 0 decimal places, e.g. 5,275.)

Click here to view the factor table. Present Value of 1
Click here to view the factor table. Present Value of an Annuity of 1

(a)	Market interest rate 4%		$enter a dollar amount rounded to 0 decimal places
(b)	Market interest rate 5%		$enter a dollar amount rounded to 0 decimal places
(c)	Market interest rate 6%		$enter a dollar amount rounded to 0 decimal places

Prepare the journal entry to record the issuance of the bond assuming the market rate of interest is: (a) 4%, (b) 5%, and (c) 6%. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

No.	Account Titles and Explanation	Debit	Credit
(a)	enter an account title to record issuance of bonds	enter a debit amount	enter a credit amount
	enter an account title to record issuance of bonds	enter a debit amount	enter a credit amount
	(To record issuance of bonds.)
(b)	enter an account title to record issuance of bonds	enter a debit amount	enter a credit amount
	enter an account title to record issuance of bonds	enter a debit amount	enter a credit amount
	(To record issuance of bonds.)
(c)	enter an account title to record issuance of bonds	enter a debit amount	enter a credit amount
	enter an account title to record issuance of bonds	enter a debit amount	enter a credit amount
	(To record issuance of bonds.)

Answer 1

The price of the bond if the Market interest rates are (a) 4%, (b) 5%, and (c) 6%.

(a)-The price of the bond if the Market interest rate is 4.00%

Price of the Bond = Present Value of the Coupon Payments + Present Value of the face Value

= $8,000[PVIFA 2.00%, 10 Years] + $320,000[PVIF 2.00%, 10 Years]

= [$8,000 x 8.98259] + [$320,000 x 0.82035]

= $71,861 + $262,512

= $334,373

(b)-The price of the bond if the Market interest rate is 5.00%

Price of the Bond = Present Value of the Coupon Payments + Present Value of the face Value

= $8,000[PVIFA 2.50%, 10 Years] + $320,000[PVIF 2.50%, 10 Years]

= [$8,000 x 8.75206] + [$320,000 x 0.78120]

= $70,017 + $249,983

= $320,000

(c)-The price of the bond if the Market interest rate is 6.00%

Price of the Bond = Present Value of the Coupon Payments + Present Value of the face Value

= $8,000[PVIFA 3.00%, 10 Years] + $320,000[PVIF 3.00%, 10 Years]

= [$8,000 x 8.53020] + [$320,000 x 0.74409]

= $68,248 + $238,109

= $306,350

The journal entry to record the issuance of the bond assuming the market rate of interest is: (a) 4%, (b) 5%, and (c) 6%.

(a)-The journal entry to record the issuance of the bond if the market rate of interest is 4.00%

Accounts Tittles and explanations	Debit ($)	Credit ($)
Cash A/c	3,34,373
To Premium on Bond Payable A/c		14,373
To Bond Payable A/c		320,000
[Journal entry to record the issuance of Bond]

(b)-The journal entry to record the issuance of the bond if the market rate of interest is 5.00%

Accounts Tittles and explanations	Debit ($)	Credit ($)
Cash A/c	320,000
To Bond Payable A/c		320,000
[Journal entry to record the issuance of Bond]

(c)-The journal entry to record the issuance of the bond if the market rate of interest is 6.00%

Accounts Tittles and explanations	Debit ($)	Credit ($)
Cash A/c	3,06,350
Discount on Bond Payable A/c	13,650
To Bond Payable A/c		320,000
[Journal entry to record the issuance of Bond]

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)n} / r], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.

-The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)n], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.