Question

Hartford Research issues bonds dated January 1 that pay interest semiannually on June 30 and December 31. The bonds have a $24,000 par value and an annual contract rate of 8%, and they mature in 10 years. (Table B.1, Table B.2, Table B.3, and Table B.4) (Use appropriate factor(s) from the tables provided. Round all table values to 4 decimal places, and use the rounded table values in calculations.) Required: Consider each separate situation. 1. The market rate at the date of issuance is 6%. (a) Complete the below table to determine the bonds' issue price on January 1. (b) Prepare the journal entry to record their issuance. 2. The market rate at the date of issuance is 8%. (a) Complete the below table to determine the bonds' issue price on January 1. (b) Prepare the journal entry to record their issuance. 3. The market rate at the date of issuance is 10%. (a) Complete the below table to determine the bonds' issue price on January 1. (b) Prepare the journal entry to record their issuance. Complete this question by entering your answers in the tabs below. Required 1A Required 16 Required 2A Required 2B Required 3A Required 3B Complete the below table to determine the bonds' issue price on January 1 if the market rate at the date of issuance is 6%. Table values are based on: Cash Flow Table Value Amount Present Value Par (maturity) value Interest (annuity) Price of bonds

Answer 1

1) Market rate at the date of issuance is 6%

Since interest is paid semi-annually,

n = 10 years*2 = 20

i = 6%

Par value = $24,000

Coupon rate = 8% annually = 4% semiannually

Coupon payments = 24000*4% = $960 semi-annually

Present value of the interest annuity of $960 for a term of 20 periods and a future maturity value of $24,000 is $18,494.4378

So, the price of the bonds is $18,494.4378

Journal entry:

Jan 1 Cash Account 18,494.4378

Discount on Bond Payable 5505.5622

To Bonds payable 24,000

June 30 Interest on Bonds 720

To Cash 720

Dec 31 Interest on Bonds 720

To Cash 720

2) Market rate at the date of issuance is 8%

Since interest is paid semi-annually,

n = 10 years*2 = 20

i = 8%

Par value = $24,000

Coupon rate = 8% annually or 4% semi annually

Coupon payments = 24000*4% = $960 semi-annually

Present value of the interest annuity of $960 for a term of 20 periods and a future maturity value of $24,000 is $14,574.5785

So, the price of the bonds is $14,574.5785

Journal entry:

Jan 1 Cash Account 14,574.5785

Discount on Bond Payable 9425.4215  

To Bonds payable 24,000

June 30 Interest on Bonds 720

To Cash 720

Dec 31 Interest on Bonds 720

To Cash 720

3) Market rate at the date of issuance is 10%

Since interest is paid semi-annually,

n = 10 years*2 = 20

i = 10%

Par value = $24,000

Coupon rate = 8% annually = 4% semiannually

Coupon payments = 24000*4% = $960 semi-annually

Present value of the interest annuity of $960 for a term of 20 periods and a future maturity value of $24,000 is $11,740.4682

So, the price of the bonds is $18,494.4378

Journal entry:

Jan 1 Cash Account 11,740.4682

Discount on Bond Payable 12,259.5318

To Bonds payable 24,000

June 30 Interest on Bonds 720

To Cash 720

Dec 31 Interest on Bonds 720

To Cash 720