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Round dollar amounts to the nearest whole dollar. Assume no reversing entries are used.
Problem 10-1A
Computing bond price and recording issuance
P1 P2 P3
Check (1) Premium, $4,760
(3) Discount, $4,223 Harvard Research issues bonds dated January 1, 2009, that pay
interest semiannually on June 30 and December 31. The bonds have a $45,000 par value,
an annual contract rate of 6%, and mature in 6 years.
Required
For each of the following three separate situations, (a) determine the bonds' issue price on
January 1, 2009, and (b) prepare the journal entry to record their issuance.
1. Market rate at the date of issuance is 4%.
2. Market rate at the date of issuance is 6%.
3. Market rate at the date of issuance is 8%.
Part 1
a.
Cash Flow
Table
Par value ............................. B.1
Interest (annuity) ............... B.3
Price of bonds .....................
Table Value*
0.7885
10.5753
Amount
$45,000
1,350*
Present Value
$35,483
14,277
$49,760
Bond premium ....................
$ 4,760
*$45,000 x 0.06 x ½ = $1,350
* Table values are based on a discount rate of 2% (half the annual market
rate) and 12 periods (semiannual payments).
b.
2009
Jan. 1
Cash...................................................................................................
49,760
Premium on Bonds Payable ......................................................
Bonds Payable ............................................................................
Sold bonds on stated issue date.
4,760
45,000
Part 2
a.
Cash Flow
Table
Table Value*
Amount
Present Value
Par value ............................. B.1
Interest (annuity) ............... B.3
Price of bonds .....................
0.7014
9.9540
$45,000
1,350
$31,563
13,438
$45,001*
*Table values are based on a discount rate of 3% (half the annual market rate)
and 12 periods (semiannual payments). (Note: When the contract rate and
market rate are the same, the bonds sell at par and there is no discount or
premium. The $1 difference is due to rounding.)
b.
2009
Jan. 1
Cash...................................................................................................
45,000
Bonds Payable ............................................................................
Sold bonds on stated issue date.
45,000
Part 3
a.
Cash Flow
Table
Table Value*
Amount
Present Value
Par value ............................
B.1
0.6246
$45,000
$28,107
Interest (annuity) ..............
B.3
9.3851
1,350
12,670
Price of bonds ....................
$40,777
Bond discount ....................
$ 4,223
* Table values are based on a discount rate of 4% (half the annual market
rate) and 12 periods (semiannual payments).
b.
2009
Jan. 1
Cash...................................................................................................
40,777
Discount on Bonds Payable .............................................................
4,223
Bonds Payable ............................................................................
Sold bonds on stated issue date.
Problem 10-3A
Straight-line amortization of bond premium
P1 P3
Check (2) 6/30/2009 carrying value, $234,644 Jules issues 4.5%, five-year bonds dated
January 1, 2009, with a $230,000 par value. The bonds pay interest on June 30 and
45,000
December 31 and are issued at a price of $235,160. The annual market rate is 4% on the
issue date.
Required
1. Calculate the total bond interest expense over the bonds' life.
2. Prepare a straight-line amortization table like Exhibit 10.11 for the bonds' life.
3. Prepare the journal entries to record the first two interest payments.
Part 1
Ten payments of $5,175* .......................................
Par value at maturity ..............................................
Total repaid .............................................................
Less amount borrowed ...........................................
Total bond interest expense....................................
*$230,000 x 0.045 x ½ = $5,175
or:
Ten payments of $5,175 ..........................................
Less premium ..........................................................
Total bond interest expense....................................
$ 51,750
230,000
281,750
(235,160)
$ 46,590
$ 51,750
(5,160)
$ 46,590
Part 2
Straight-line amortization table ($5,160/10 = $516)
Semiannual
Interest Period-End
Unamortized
Premium
Carrying
Value
1/01/2009 ................................
$5,160
$235,160
6/30/2009 ................................
4,644
234,644
12/31/2009 ................................
4,128
234,128
6/30/2010 ................................
3,612
233,612
12/31/2010 ................................
3,096
233,096
6/30/2011 ................................
2,580
232,580
12/31/2011 ................................
2,064
232,064
6/30/2012 ................................
1,548
231,548
12/31/2012 ................................
1,032
231,032
6/30/2013 ................................
516
230,516
12/31/2013 ................................
0
230,000
Part 3
2009
June 30
Bond Interest Expense.....................................................................
4,659
Premium on Bonds Payable ............................................................
516
Cash.............................................................................................
5,175
To record six months’ interest and
premium amortization.
2009
Dec. 31
Bond Interest Expense.....................................................................
4,659
Premium on Bonds Payable ............................................................
516
Cash.............................................................................................
To record six months’ interest and
premium amortization.
5,175