Question

Flagstaff Systems issues bonds dated January 1 that pay interest samiannually 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.

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 10%.

2. The market rate at the date of issuance is 12%.

3. The market rate at the date of issuance is 14%.

Answer 1

Answer:

1.)

Cash Flow	Value from table	Amount ($)	Present value ($)
Par value	0.6139	90,000	55,251,
Annuity (interest)	7.7217	5,400	41,697
Bonds issue price			96,948
Premium on bond			6,948

Date	Account titles and explanation	Debit ($)	Credit ($)
Jan 1	Cash	96,948
	Premium on Bonds Payble		6,948
	Bonds Payable		90,000
	(To record the issue of bonds at premium)

2.)

Cash Flow	Value from table	Amount ($)	Present Value ($)
Par value	0.5584	90,000	50,255
Annuity (Interest)	7.3601	5,400	39,745
Bonds issue price			90,000

Date	Account titles and explanation	Debit ($)	Credit ($)
Jan1	Cash	90,000
	Bonds Payable		90,000
	(To record the issue of bonds at par)

3.)

Cash Flow	Value from table	Amount ($)	Present Value ($)
Par value	0.5083	90,000	45,747
Annuity (Interest)	7.0236	5,400	37,927
Bonds issue price			83,674
Discount on bond			6,326

Date	Account titles and explanation	Debit ($)	Credit ($)
Jan1	Cash	83,674
	Discount on Bonds Payable	6,326
	Bonds Payable		90,000
	(To record the issue of bonds at par)