Question

Present Value of $1 PV of Annuity of $1

Issuance of a Bond at Face Value

On January 1, 2017, Whitefeather Industries issued 1,000, $1,000 face value bonds. The bonds have a(n) 10-year life and pay interest at the rate of 10%. Interest is paid semiannually on July 1 and January 1. The market rate of interest on January 1 was 10%. Use the present value tables that may be found by clicking on the present value table links above. Round your answer to the nearest dollar.

Required:

1. Calculate the issue price of the bonds and record the issuance of the bonds on January 1, 2017. Round your final answer to the nearest dollar.

$___________

Identify and analyze the effect of the issuance of the bonds on January 1, 2017.

Activity
Accounts
Statement(s)

How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.

Balance Sheet

Income Statement

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

–

Expenses

=

Income

2. How would the issue price have been affected if the market rate of interest had been higher than 10%.
_______________

3. Identify and analyze the effect of the payment of interest on July 1, 2017.

Activity
Accounts
Statement(s)

How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.

Balance Sheet

Income Statement

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

–

Expenses

=

Income

4. Calculate the amount of interest accrued on December 31, 2017. If required, round your answer to the nearest dollar.
$________

Answer 1

Working notes: Based on PV table PV factor PV of Amount at 4% Cash flows Face value-Bond $1,000,000 0.37689 $376,889 Cash interest $50,000 12.46221 $623,111 Issue price of Bond $1,000,000 Cash interest at 10% of $1,000,000 for 6 months = $1,000,000*10%/2 1 Issue price of Bond $1,000,000 Date Credit Debit $1,000,000 Jan 1 2017 Account Titles and Explanation Cash Bond payable (To record issue of bonds) $1,000,000

Activity Accounts Statement(s) Issue of Bonds Cash and Bonds payable Balance sheet Balance Sheet Income Statement Net Revenues Expenses Income Assets Stockholders' Equity Liabilities + $1,000,000 $1,000,000 2 Bonds would have been issued at discount if market interest rate of interest is higher than stated interest rate 10% 3 Activity Accounts Statement(s) Payment of Interest Cash, Interest expense and Stockholders' Equity Income Statement and Balance sheet Payment of interest on July 1, 2017 Balance Sheet Stockholders' Assets = Liabilities + Equity -$50,000 -$50,000 Income Statement Net Revenues Expenses = Income $50,000 - $50,000 4 Interest accrued on December 31, 2017 $50,000 Cash interest accrued at 10% of $1,000,000 for 6 months = $1,000,000*10%/2