Question

790 chapter 14 Learning Objectives 2, 3, 4 3. June 30, 2018, Interest Expense $25,200 P14-34A Analyzing and journalizing bond transactions 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. 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. Journalize 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.

Answer 1

the market interest rate of 7% is less than the coupon rate of 8%, hence the bond shall be priced at premium because the bond is paying more than the market's expectation and accordingly the investors are willing to pay the extra amount for the bond. the market interest rate of 9% is more than the coupon rate of 8%, hence the bond shall be priced at discount because the bond is paying less than the market's expectation and accordingly the investors are willing to pay the less amount for the bond.

3 no. date account titles and explanation debit credit calculation a 01 January 2018 $552,000 $ 48,000 $600,000 * 92% $600,000 - $552,000 cash discount on bonds payable bonds payable (to record issue of bonds) $ 600,000 b 30 June 2018 $ 25,200 interest expense discount on bonds payable cash (to record interest expense) $ 1,200 $ 24,000 $1,200 + $24,000 $48,000 / 40 $600,000 * 8% / 2 $ 25,200 C 31 December 2018 interest expense discount on bonds payable cash (to record interest expense) $ 1,200 $ 24,000 $ 600,000 d 31 December 2037 bonds payable cash (to record retirement of bonds) $ 600,000

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