Question

Hartford Research issues bonds dated January 1 that pay interest semiannually on June 30 and December 31. The bonds have a $40,000 par value and an annual contract rate of 10%, and they mature in 10 years. Required For each separate situation, (a) determine the bonds' issue price on January 1 and (b) prepare the journal entry to record their issuance. 1. The market rate at the date of issuance is 8%. 2. The market rate at the date of issuance is 10%. 3. The market rate at the date of issuance is 12%.

Answer 1

1-a) The market rate at the date of the issuance is 8%

Present value of the Principal= $40000*0.4564= $18256

Present value of interest= $40000*10%*6/12*13.5903= $27181

Present value of the bonds= Present value of the Principal+Present value of the interest

= $18256+27181= $45437

b)

Date	Account titles and explanation	Debit	Credit
January 1	Cash	$45437
	Bonds payable		$40000
	Premium on bonds payable (45437-40000)		$5437
	(To record bonds issued)

2-a) The market rate at the date of the issuance is 10%

Present value of the Principal= $40000*0.3769= $15076

Present value of interest= $40000*10%*6/12*12.4622= $24924

Present value of the bonds= Present value of the Principal+Present value of the interest

= $15076+24924= $40000

b)

Date	Account titles and explanation	Debit	Credit
January 1	Cash	$40000
	Bonds payable		$40000
	(To record bonds issued)

3-a) The market rate at the date of the issuance is 12%

Present value of the Principal= $40000*0.3118= $12472

Present value of interest= $40000*10%*6/12*11.4699= $22940

Present value of the bonds= Present value of the Principal+Present value of the interest

= $12472+22940= $35412

b)

Date	Account titles and explanation	Debit	Credit
January 1	Cash	$35412
	Discount on bonds payable (40000-35412)	$4588
	Bonds payable		$40000
	(To record bonds issued)

NOTE:- I have taken the present values of Table B.1 and Table B.3, if there is any changes in calculating the present values please ask in the comment section.