Question

PROBLEM SET B Round dollar amounts to the nearest whole doilar. Assume no reversing entries are used. Flagstaff Systems issues bonds dated January 1,2017, that pay interest semiannually on June 30 and December 31, The bonds have a $90,000 par value and an annual contract rate of 12%, and they mature in five years. Problem 14-1B Computing bond price and recording issuance C2 Required For each of the following three separate situations, (a) determine the bonds' issue price on January 1. 2017, and (b) prepare the journal entry to record their issuance. 1, The market rate at the date of issuance is 10%. 2. The market rate at the date of issuance is 12%. 3. The market rate at the date of issuance is 14%. P1 Check (1) Premium, $6,948 (3) Discount, $6.326

Answer 1

The answer may be different due to round off.

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at market rate of interest, and

Discounted Interest payments amount (during the lifetime) at market rate of interest.

Requirement 1

	Annual Rate	Applicable rate		Face Value	$         90,000.00
Market Rate	10.00%	5.00%		Term (in years)	5
Coupon Rate	12.00%	6.00%		Total no. of interest payments	10

Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$       90,000	at	5.00%	Interest rate for	10	term payments
PV of $1	0.61391
PV of	$       90,000	=	$        90,000	x	0.61391	=	$       55,252	A
Interest payable per term	at	6%	on	$       90,000
Interest payable per term	$         5,400
PVAF of 1$	for	5.0%	Interest rate for	10	term payments
PVAF of 1$	7.72173
PV of Interest payments	=	$            5,400.00	x	7.72173	=		$       41,697	B
				Bond Value (A+B)			$       96,950

Journal entry

Description	Debit	Credit
Cash	$      96,950
Premium on bonds Payable		$       6,950
Bonds payable		$    90,000
(Issue of bonds )

.

Requirement 2

	Annual Rate	Applicable rate		Face Value	$         90,000.00
Market Rate	12.00%	6.00%		Term (in years)	5
Coupon Rate	12.00%	6.00%		Total no. of interest payments	10

Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$   90,000	at	6.00%	Interest rate for	10	term payments
PV of $1	0.55839
PV of	$   90,000	=	$   90,000	x	0.55839	=	$ 50,256	A
Interest payable per term	at	6%	on	$       90,000
Interest payable per term	$     5,400
PVAF of 1$	for	6.0%	Interest rate for	10	term payments
PVAF of 1$	7.36009
PV of Interest payments	=	$            5,400.00	x	7.36009	=		$ 39,744	B
				Bond Value (A+B)			$ 90,000

Journal entry

Description	Debit	Credit
Cash	$      90,000
Bonds payable		$    90,000
(Issue of bonds )

.

Requirement 3

	Annual Rate	Applicable rate		Face Value	$         90,000.00
Market Rate	14.00%	7.00%		Term (in years)	5
Coupon Rate	12.00%	6.00%		Total no. of interest payments	10

Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$   90,000	at	7.00%	Interest rate for	10	term payments
PV of $1	0.5083493
PV of	$   90,000	=	$   90,000	x	0.50835	=	$ 45,751	A
Interest payable per term	at	6%	on	$       90,000
Interest payable per term	$     5,400
PVAF of 1$	for	7.0%	Interest rate for	10	term payments
PVAF of 1$	7.02358
PV of Interest payments	=	$            5,400.00	x	7.02358	=		$ 37,927	B
				Bond Value (A+B)			$ 83,679

Description	Debit	Credit
Cash	$      83,679
Discount on bonds Payable	$         6,321
Bonds payable		$    90,000
(Issue of bonds )