Question

On January 1, 2018, Nurses Credit Union (NCU) issued 8%, 20-year bonds payable with face value of $600,000. The bonds pay interest on June 30 and December 31. Read the requirements. Requirement 1. If the market interest rate is 7% when NCU issues its bonds, will the bonds be priced at face value, at a premium, or at a discount? Explain. The 8% bonds issued when the market interest rate is 7% will be priced at V. They are in this market, so investors will pay to acquire them. Requirements 1. If the market interest rate is 7% when NCU 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 NCU 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 92. Joumalize 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. Print Done

Answer 1

1	The 8% bond issued when the market interest rate is 7% will be priced at premium. They are attractive in this market.So investors will pay more than face value to acquire them
2	The 8% bond issued when the market interest rate is 9% will be priced at discount. They are unattractive in this market.So investors will pay less than face value to acquire them
3	Journal entries:
	Sl No.	Date	Account titles					Debit	Credit
	a.	Jan 1,2018	Cash			(600000/100)*92		552000
			Discount on issue of bonds			(600000-552000)		48000
			Bonds payable						600000
			(Issue of bonds at discount)
	b.	June 30,2018	Interest expense			(Note:1)		24840
			Discount on issue of bonds			(24840-24000)			840
			Cash			(600000*8%*6/12)			24000
			(Interest on bond paid)
	c.	Dec 31,2018	Interest expense			(Note:2)		24878
			Discount on issue of bonds			(24878-24000)			878
			Cash			(600000*8%*6/12)			24000
			(Interest on bond paid)
	d.	Dec 31,2037	Bonds payable					600000
			Cash						600000
			(Bond retired at maturity)
	Note:1
	Here,bond is issued at discount.
	Hence,market interest rate=9%
	Interest expense=Bond issue price*Market interest rate=552000*9%*6/12=$ 24840
	Note:2
	Interest expense=(Bond issue price+Discount amortized)*Market interest rate=(552000+840)*9%*6/12=$ 24878