Question

E15–3 On September 1, 2013, Priora Corporation issued $600,000 of 10-year, 3% bonds at 96. Interest is payable semi-annually on September 1 and March 1. Priora’s fiscal year-end is February 28.

Instructions

(a) Is the market rate of interest higher or lower than  3%? Explain. 

(b) Record the issue of the bonds on September 1, 2013. (c) Record the accrual of interest on February 28, 2014, assuming the semi-annual amortization

amount for this Interest period is $1,014. (d) Identifywhatamounts, if any, would be reported as a current liability and non-current liability with

respect to the bonds and bond interest accounts on February 28, 2014. (e) Record the payment of interest on March 1, 2014.

Answer 1

Prior Corporation issued bonds of $6,00,000 for 10 year @ 3% at 96

So the number of bonds is 6250.

(a) Market rates depend on your capacity to bear the risk

if someone wants do not to take the risk, the bonds are better @3 %

If someone wants to take the risk and invest in the equity market or mutual fund, they can get a good return from the market. (higher than 3%)

(b)
Recording the bonds in books of Account
Bank A/C	Debit	6,00,000
Bond A/c	Credit	6,00,000

Note:- Assume that 3% is not compounded; hence 1.5% of Semi-Annually.

(c)
The accrual interest amount is $ 9,000

(d)
Current liability and noncurrent liability as of Feb 28, 2014
Particulars	Current liability	Non-Current liability	Remarks
Bonds	6,00,000	0	Noncurrent liability will be zero as liability is not more than one year.
Interest	9,000	0	Noncurrent liability will be zero as liability is not more than one year.

(e)
Payment of interest as of March 1, 2014
Interest	Debit	9,000
Bank A/C	Credit	9,000