Solutions Guide: This is meant as a solutions guide
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 |Table Value* |Amount |Present Value |
|Par value |B.1 | 0.7885 |$45,000 |$35,483 |
|Interest (annuity) |B.3 |10.5753 | 1,350* | 14,277 |
|Price of bonds | | | |$49,760 |
|Bond premium | | | |$ 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 | |4,760 |
| | Bonds Payable | |45,000 |
| | Sold bonds on stated issue date. | | |
Part 2
a.
|Cash Flow |Table |Table Value* |Amount |Present Value |
|Par value |B.1 |0.7014 |$45,000 |$31,563 |
|Interest (annuity) |B.3 |9.9540 | 1,350 | 13,438 |
|Price of bonds | | | |$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 | |45,000 |
| | Sold bonds on stated issue date. | | |
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 | |45,000 |
| | 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 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 $5,175* |$ 51,750 |
|Par value at maturity | 230,000 |
|Total repaid |281,750 |
|Less amount borrowed | (235,160) |
|Total bond interest expense |$ 46,590 |
|*$230,000 x 0.045 x ½ = $5,175 | |
or:
|Ten payments of $5,175 |$ 51,750 |
|Less premium | (5,160) |
|Total bond interest expense |$ 46,590 |
Part 2
Straight-line amortization table ($5,160/10 = $516)
|Semiannual |Unamortized |Carrying |
|Interest Period-End |Premium |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 | |5,175 |
| | To record six months’ interest and | | |
| |premium amortization. | | |
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