Question

Hartford Research issues bonds dated January 1 that pay interest semiannually on June 30 and December 31. The bonds have a $21,000 par value and an annual contract rate of 10%, and they mature in 10 years. (Table B.1. Table B.2. Table B.3, and Table 8.4) (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 8%. (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 10%. (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 12%. (a) Complete the below table to determine the bonds' Issue price on January 1. (b) Prepare the journal entry to record their issuance.

Answer 1

PRESENT VALUE
COUPON AMOUNT * CUMULATIVE PRESENT VALUE FACTOR OF INTEREST RATE
MATURITY VALUE * PRESENT VALUE FACTOR OF LAST YEAR INTEREST RATE

A)

		8%
YEARS	SEMI ANNUAL INTEREST	INTEREST RATE	PRESENT VALUE
1	1050	0.925925926	$                972.22
2	1050	0.85733882	$                900.21
3	1050	0.793832241	$                833.52
4	1050	0.735029853	$                771.78
5	1050	0.680583197	$                714.61
6	1050	0.630169627	$                661.68
7	1050	0.583490395	$                612.66
8	1050	0.540268885	$                567.28
9	1050	0.500248967	$                525.26
10	1050	0.463193488	$                486.35
11	1050	0.428882859	$                450.33
12	1050	0.397113759	$                416.97
13	1050	0.367697925	$                386.08
14	1050	0.340461041	$                357.48
15	1050	0.315241705	$                331.00
16	1050	0.291890468	$                306.48
17	1050	0.270268951	$                283.78
18	1050	0.250249029	$                262.76
19	1050	0.231712064	$                243.30
20	1050	0.214548207	$                225.28
20	21000	0.214548207	$            4,505.51
TOTAL			$          14,814.57
JOURNAL ENTRY
DATE	PARTICULARS	DEBIT	CREDIT
01-Jan	CASH	$         14,814.57
	DISCOUNT ON ISSUANCE OF BONDS	$           6,185.43
	BONDS PAYABLE		$          21,000.00
	BEING BOND ISSUED ON DISCOUNT

B)

		10%
YEARS	SEMI ANNUAL INTEREST	INTEREST RATE	PRESENT VALUE
1	1050	0.909090909	$                954.55
2	1050	0.826446281	$                867.77
3	1050	0.751314801	$                788.88
4	1050	0.683013455	$                717.16
5	1050	0.620921323	$                651.97
6	1050	0.56447393	$                592.70
7	1050	0.513158118	$                538.82
8	1050	0.46650738	$                489.83
9	1050	0.424097618	$                445.30
10	1050	0.385543289	$                404.82
11	1050	0.350493899	$                368.02
12	1050	0.318630818	$                334.56
13	1050	0.28966438	$                304.15
14	1050	0.263331254	$                276.50
15	1050	0.239392049	$                251.36
16	1050	0.217629136	$                228.51
17	1050	0.197844669	$                207.74
18	1050	0.17985879	$                188.85
19	1050	0.163507991	$                171.68
20	1050	0.148643628	$                156.08
20	21000	0.148643628	$            3,121.52
TOTAL			$          12,060.76
JOURNAL ENTRY
DATE	PARTICULARS	DEBIT	CREDIT
01-Jan	CASH	$         12,060.76
	DISCOUNT ON ISSUANCE OF BONDS	$           8,939.24
	BONDS PAYABLE		$          21,000.00
	BEING BOND ISSUED ON DISCOUNT

C)

		12%
YEARS	SEMI ANNUAL INTEREST	INTEREST RATE	PRESENT VALUE
1	1050	0.892857143	$                937.50
2	1050	0.797193878	$                837.05
3	1050	0.711780248	$                747.37
4	1050	0.635518078	$                667.29
5	1050	0.567426856	$                595.80
6	1050	0.506631121	$                531.96
7	1050	0.452349215	$                474.97
8	1050	0.403883228	$                424.08
9	1050	0.360610025	$                378.64
10	1050	0.321973237	$                338.07
11	1050	0.287476104	$                301.85
12	1050	0.256675093	$                269.51
13	1050	0.22917419	$                240.63
14	1050	0.204619813	$                214.85
15	1050	0.182696261	$                191.83
16	1050	0.163121662	$                171.28
17	1050	0.145644341	$                152.93
18	1050	0.13003959	$                136.54
19	1050	0.116106777	$                121.91
20	1050	0.103666765	$                108.85
20	21000	0.103666765	$            2,177.00
TOTAL			$          10,019.92
JOURNAL ENTRY
DATE	PARTICULARS	DEBIT	CREDIT
01-Jan	CASH	$         10,019.92
	DISCOUNT ON ISSUANCE OF BONDS	$         10,980.08
	BONDS PAYABLE		$          21,000.00
	BEING BOND ISSUED ON DISCOUNT

SHOW FORMULA IN EXCEL FOR PRESENT VALUE COMPUTATION

		0.08
YEARS	SEMI ANNUAL INTEREST	INTEREST RATE	PRESENT VALUE
1	=21000*10%/2	=1/(1.08)^RC[-2]	=RC[-2]*RC[-1]
2	=21000*10%/2	=1/(1.08)^RC[-2]	=RC[-2]*RC[-1]
3	=21000*10%/2	=1/(1.08)^RC[-2]	=RC[-2]*RC[-1]
4	=21000*10%/2	=1/(1.08)^RC[-2]	=RC[-2]*RC[-1]
5	=21000*10%/2	=1/(1.08)^RC[-2]	=RC[-2]*RC[-1]
6	=21000*10%/2	=1/(1.08)^RC[-2]	=RC[-2]*RC[-1]
7	=21000*10%/2	=1/(1.08)^RC[-2]	=RC[-2]*RC[-1]
8	=21000*10%/2	=1/(1.08)^RC[-2]	=RC[-2]*RC[-1]
9	=21000*10%/2	=1/(1.08)^RC[-2]	=RC[-2]*RC[-1]
10	=21000*10%/2	=1/(1.08)^RC[-2]	=RC[-2]*RC[-1]
11	=21000*10%/2	=1/(1.08)^RC[-2]	=RC[-2]*RC[-1]
12	=21000*10%/2	=1/(1.08)^RC[-2]	=RC[-2]*RC[-1]
13	=21000*10%/2	=1/(1.08)^RC[-2]	=RC[-2]*RC[-1]
14	=21000*10%/2	=1/(1.08)^RC[-2]	=RC[-2]*RC[-1]
15	=21000*10%/2	=1/(1.08)^RC[-2]	=RC[-2]*RC[-1]
16	=21000*10%/2	=1/(1.08)^RC[-2]	=RC[-2]*RC[-1]
17	=21000*10%/2	=1/(1.08)^RC[-2]	=RC[-2]*RC[-1]
18	=21000*10%/2	=1/(1.08)^RC[-2]	=RC[-2]*RC[-1]
19	=21000*10%/2	=1/(1.08)^RC[-2]	=RC[-2]*RC[-1]
20	=21000*10%/2	=1/(1.08)^RC[-2]	=RC[-2]*RC[-1]
20	21000	=1/(1.08)^RC[-2]	=RC[-2]*RC[-1]
TOTAL			=SUM(R[-21]C:R[-1]C)
JOURNAL ENTRY
DATE	PARTICULARS	DEBIT	CREDIT
43466	CASH	=R[-5]C[1]
	DISCOUNT ON ISSUANCE OF BONDS	=R[1]C[1]-R[-1]C
	BONDS PAYABLE		21000
	BEING BOND ISSUED ON DISCOUNT