Question

Hartford Research issues bonds dated January 1, 2016, that pay interest semiannually on June 30 and December 31. The bonds have a $23,000 par value and an annual contract rate of 8%, and they mature in 10 years. (Table B.1, Table B.2, Table B.3, and Table B.4) (Use appropriate factor(s) from the tables provided.)

  

Required:

Consider each of the following three separate situations.

  

1. The market rate at the date of issuance is 6%.

(a) Complete the below table to determine the bonds' issue price on January 1, 2016.

(b) Prepare the journal entry to record their issuance.

2. The market rate at the date of issuance is 8%.

(a) Complete the below table to determine the bonds' issue price on January 1, 2016.

(b) Prepare the journal entry to record their issuance.

3. The market rate at the date of issuance is 10%.

(a) Complete the below table to determine the bonds' issue price on January 1, 2016.

(b) Prepare the journal entry to record their issuance.

Answer 1

1)

(a)Since the interest is paid semi-annually the bond interest rate period is 8 per cent so, 8/2=4 per cent for six months.

The market interest rate is 6 per cent so therefore 6/2=3 per cent and number of periods will be (2*10)=20

Price of the bond=4%*$23000*1-(1+3%)²⁰/3%+$23000/(1+3%)²⁰

$26425 will be the issue price

(b) Cash account debit 26425

To Bond Payable credit 26425

2)

(a)The market rate is 8 per cent so instead of 3 oer cent now 4 per cent will be used in above formulae.

The price of bond will be

4 per cent * 23000 * 1-(1+4)^-20/4 per cent + $23000/(1+4 per cent)²⁰

$23005 will be the issue pice of bond.

(b) Cash Account debit 23005

To Bonds payable Account credit 23005

3)

The market rate is 10 per cent so instead of 4 per cent now 5 per cent will be used in above formulae.

The price of bond will be

4 per cent * 23000 * 1-(1+5)^-20/5 per cent + $23000/(1+5 per cent)²⁰

^$20142

^(b)

^{Cash Account debit 20142}

^{To Bonds payable Account credit 20142}

^{For interest a common entry will be pased every six months.}

^{Interest expense account debit 920}

^{To Bonds payable Account credit 920}