Question

Exercise 10-8A Computing bond interest and price; recording bond issuance LO C2, P3

Citywide Company issues bonds with a par value of $65,000 on their stated issue date. The bonds mature in nine years and pay 10% annual interest in semiannual payments. On the issue date, the annual market rate for the bonds is 8%. (Table B.1, Table B.2, Table B.3, and Table B.4) (Use appropriate factor(s) from the tables provided.)

1. What is the amount of each semiannual interest payment for these bonds?
2. How many semiannual interest payments will be made on these bonds over their life?
3. Use the interest rates given to select whether the bonds are issued at par, at a discount, or at a premium.
4. Compute the price of the bonds as of their issue date.
5. Prepare the journal entry to record the bonds’ issuance.

What is the amount of each semiannual interest payment for these bonds?
How many semiannual interest payments will be made on these bonds over their life?
Use the interest rates given to select whether the bonds are issued at par, at a discount, or at a premium.

	Par (maturity) value Semiannual Rate Semiannual cash interest payment = Number of payments Whether the bonds are issued at par, at a discount, or at a premium?

Compute the price of the bonds as of their issue date. (Round intermediate calculations to the nearest dollar amount.)

	Table Values are Based on: n = i = Cash Flow Table Value Amount Present Value Par (maturity) value Interest (annuity) Price of bonds $0

Note: Enter debits before credits.

	Transaction General Journal Debit Credit 1

Answer 1

Solution 1:

Computation of Semiannual cash interest payment
Par (maturity Value)	Annual Rate	Semiannual period	Semiannual cash interest payment
$65,000.00	10%	2	$3,250.00

Solution 2:

Nos of semiannual interest payments will be made on these bonds over their life = 9*2 = 18

Solution 3:

As market rate of interest is lower than coupon rate, therefore bonds are issued at premium.

Solution 4:

Computation of bond price
Table values are based on:
n=	18
i=	4%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.49363	$65,000	$32,086
Interest (Annuity)	12.65930	$3,250	$41,143
Price of bonds			$73,229

Solution 5:

Journal Entries - Citywide
Event	Particulars	Debit	Credit
1	Cash A/c Dr	$73,229.00
	To Bonds payable		$65,000.00
	To Premium on Bonds payable		$8,229.00
	(To record issue of bond at Premium)