Homework Answers
| Requirement 1 : | |
| It is given in the question that bonds are issued with 8% interest. | |
| Stated interest rate is the rate at which is interest is calculated on face value of the bond. | |
| Stated interest rate for the bond issue = 8% | |
| Requirement 2: | |
| A bond may be issued at premium or discount based on market expectation | |
| If the stated interest rate for the bond is less than market expect rate , then no investor would buy the said bond. | |
| To cope with the less demand, the company issues bond at a discount which is lesser than face value of the bond. | |
| In the sameway, if market expected rate isless than bond stated rate then demand for bond increases and | |
| company will have a luxury to issue bond at premium . | |
| In simple terms, if issue price is higher than face value then the bond is said to be issued at premium and viceversa. | |
| In the current situation, bond face value is $100,000 and the issue price is $102,530. | |
| Issue price is more than the face value of the bond,therefore we can say that bonds are issued at a premium. | |
| Requirement 3: | |
| The market price of the bond is issue price ie., $102,530 | |
| Lipton would receive cash of $102,530 | |
| Requirement 4 : | ||||
| It is given in the question that interest is paid annually beginning from june 30,2015 | ||||
| Interest on june 30,2015 = 100,000 x8% = $8,000 | ||||
| Bondholders will receive $8,000 | ||||
| Requirement 5 : | ||||
| Irrespective of the market condtions, the commpany has to pay face value of the bond on the date maturity. | ||||
| value of the bond when they redeemed at maturity = $100,000 which is face value of the bond. | ||||
| The company will have to pay bondholders on june 30,2019 is face value of the bond along with interest. | ||||
| Payment to bondholders = $100,000 +$8,000 = $ 108,000 | ||||
| Requirement 6 : | ||||
| Date | Accounts title | Debit | Credit | |
| 30-Jun-14 | Cash | $ 102,530 | ||
| Premium on bonds payable | $ 2,530 | |||
| Bondpayable | $ 100,000 | |||
| [ To record the issue of bonds at a premium ] | ||||
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