Question

Hartford Research issues bonds dated January 1, 2017, that pay interest semiannually on June 30 and December 31. The bonds have a $24,000 par value and an annual contract rate of 8%, and they mature in 10 years. (Table B.1, Table B.2, Table B.3, and Table B.4) (Use appropriate factor(s) from the tables provided. Round all table values to 4 decimal places, and use the rounded table values in calculations.) Required: Consider each of the following three separate situations. 1. The market rate at the date of issuance is 6%. (a) Complete the below table to determine the bonds' issue price on January 1, 2017. (b) Prepare the journal entry to record their issuance. 2. The market rate at the date of issuance is 8%. (a) Complete the below table to determine the bonds' issue price on January 1, 2017. (b) Prepare the journal entry to record their issuance. 3. The market rate at the date of issuance is 10%. (a) Complete the below table to determine the bonds' issue price on January 1, 2017. (b) Prepare the journal entry to record their issuance.

Answer 1

Correct Answer:

Table values are based on:
n=	3.00%
i=	4.00%
Cash flow	Table value	Amount	Present value
Par (maturity) value	0.55368	$                 24,000.00	$              13,286
Interest (annuity)	14.87747	$                             960	$              14,282
Price of bonds			$              27,091

Date	Description	Debit	Credit
01-01-2007	Cash	$              27,091
	Premium on bond payable		$          3,091
	bonds payable		$        24,000
	(to record issuance of bond at a premium)

Working:

	Annual Rate	Applicable rate		Face Value	$                 24,000.00
Market Rate	6.00%	3.00%		Term (in years)	10
Coupon Rate	8.00%	4.00%		Total no. of interest payments	20

Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$                       24,000	at	3.00%	Interest rate for	20	term payments
PV of $1	0.5537
PV of	$                       24,000	=	$                    24,000	x	0.5337	=	$              12,808.80	A
Interest payable per term	at	4.0%	on	$                              24,000
Interest payable per term	$                             960
PVAF of 1$	for	3.0%	Interest rate for	20	term payments
PVAF of 1$	14.8775
PV of Interest payments	=	$              960.00	x	14.8775	=		$              14,282.40	B
				Bond Value (A+B)			$                    27,091

:

Requirement 2:

Table values are based on:
n=	4.00%
i=	4.00%
Cash flow	Table value	Amount	Present value
Par (maturity) value	0.4564	$                 24,000.00	$              10,954
Interest (annuity)	13.5903	$                             960	$              13,047
Price of bonds			$              24,000

B:

Date	Description	Debit	Credit
01-01-2007	Cash	$              24,000
	bonds payable		$        24,000
	(to record issuance of bond at par)

Working:

		Annual Rate	Applicable rate		Face Value	$       24,000.00
	Market Rate	8.00%	4.00%		Term (in years)	10
	Coupon Rate	8.00%	4.00%		Total no. of interest payments	20
Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$                       24,000	at	4.00%	Interest rate for	20	term payments
PV of $1	0.4564
PV of	$                       24,000	=	$                    24,000	x	0.4564	=	$              10,953.60	A
Interest payable per term	at	4.0%	on	$                              24,000
Interest payable per term	$                             960
PVAF of 1$	for	4.0%	Interest rate for	20	term payments
PVAF of 1$	13.5903
PV of Interest payments	=	$              960.00	x	13.5903	=		$              13,046.69	B
				Bond Value (A+B)			$                    24,000

Requirement 3:

Table values are based on:
n=	5.00%
i=	4.00%
Cash flow	Table value	Amount	Present value
Par (maturity) value	0.3769	$                 24,000.00	$                9,046
Interest (annuity)	12.4622	$                            960	$              11,964
Price of bonds			$              21,009

B:

Date	Description	Debit	Credit
01-01-2007	Cash	$              21,009
	Discount on bond payable	$                2,991
	bonds payable		$        24,000
	(to record issuance of bond at a Discount)

Working:

		Annual Rate	Applicable rate		Face Value	$       24,000.00
	Market Rate	10.00%	5.00%		Term (in years)	10
	Coupon Rate	8.00%	4.00%		Total no. of interest payments	20
Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$                       24,000	at	5.00%	Interest rate for	20	term payments
PV of $1	0.3769
PV of	$                       24,000	=	$                    24,000	x	0.3769	=	$                9,045.60	A
Interest payable per term	at	4.0%	on	$                              24,000
Interest payable per term	$                             960
PVAF of 1$	for	5.0%	Interest rate for	20	term payments
PVAF of 1$	12.4622
PV of Interest payments	=	$              960.00	x	12.4622	=		$              11,963.71	B
				Bond Value (A+B)			$                    21,009

End of answer.

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