Question

Hartford Research issues bonds dated January 1, 2017, that pay interest semiannually on June 30 and December 31. The bonds have a $40,000 par value and an annual contract rate of 10%, and they mature in 10 years.

Required

For each of the following three separate situations, (a) determine the bonds’ issue price on January 1, 2017, and (b) prepare the journal entry to record their issuance.

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

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

3. The market rate at the date of issuance is 12%.

Short answer

1. If the market rate is 8%, the bonds issue price will be$45,437
2. If the market rate is 10%, the bonds issue price will be $40,000
3. If the market rate is 12%, the bonds issue price will be $35,412

Step-by-step solution

Meaning of Bond

A written instrument that a company issues to raise money for a specified period and against that amount the company needs to interest the bondholders and repays the borrowed amount at maturity is known as a bond.

Step 2:Determination of Bond Price

If market rate is 8%

Cash Flow	Table	Present value factor	Amount	Present Value
$40,000 par (maturity) value	B.1 (PV of 1)	0.4564	$40,000	$18,256
$2,000 interest payments	B.3 (PV of ann.)	13.5903	$2,000	$27,181
Bond Selling Price				$ 45,437

Working note:

$\begin{array}{c}Premiumonbond=\$45,437-\$40,000\\ =\$5,437\end{array}$

If market rate is 10%

Cash Flow

Table

Present value factor

Amount

Present Value

$40,000 par (maturity) value	B.1 (PV of 1)	0.3769	$40,000	$15,076
$2,000 interest payments	B.3 (PV of ann.)	12.4622	$2,000	$24,924
Bond Selling Price				$ 40,000

Bond Price at par = Contract rate = Market rate

Therefore, Bond Selling price is $ 40,000

If market rate is 12%

Cash Flow	Table	Present value factor	Amount	Present Value
$40,000 par (maturity) value	B.1 (PV of 1)	0.3118	$40,000	12,472
$2,000 interest payments	B.3 (PV of ann.)	11.4699	$2,000	22,940
Bond Selling Price				$ 35,412

Working note:

$\begin{array}{c}Discountonbond=\$40,000-\$34,412\\ =\$4,588\end{array}$

Journal entries to record the issuance

If market rate is 8%

Date	Account and explanation	Debit ($)	Credit ($)
Jan 01, 2017	Cash	45,437
	Bonds Payable		40,000
	Premium on Bonds payable		5,437
	(To sold bonds at premium)

If market rate is 10%

Date	Account and explanation	Debit ($)	Credit ($)
Jan 01, 2017	Cash	40,000
	Bonds Payable		40,000
	(To sold bonds at par)

If market rate is 12%

Date	Account and explanation	Debit ($)	Credit ($)
Jan 01, 2017	Cash	35,412
	Discount on Bonds Payable	4,588
	Bonds Payable		40,000
	(To sold bonds at discount)