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Solutions Guide: This is meant as a solutions guide. Please try reworking the questions and reword the answers to essay type parts so as to guarantee that your answer is an original. Do not submit as your own. 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