Question

Flagstaff Systems issues bonds dated January 1, 2017, that pay interest semiannually on June 30 and December 31. The bonds have a $90,000 par value and an annual contract rate of 12%, and they mature in five 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 10%.
2. The market rate at the date of issuance is 12%.
3. The market rate at the date of issuance is 14%.

Short answer

(a) Issue price

1. $96,948
2. $90,000
3. $83,674

(b) Journal entry

1. Cash account is debited by $96,948, and premium on bonds payable account is credited by $6,948, and bonds payable by $90,000.
2. Cash account is debited by $90,000, and bonds payable is credited by $90,000.
3. Cash account is debited by $83,674, discount on bonds payable account is debited by $6,326 and bonds payable is credited by $90,000.

Step-by-step solution

Bond

The bond is the written promise to pay the bond’s par (or face) value and interest at a stated contract rate.

(1) The market rate at the date of issuance is 10%.

Issue of the bond at a premium: -When the contract rate of bonds is higher than the market rate, the bonds sell at a price higher than par value—the issuer gets more money at issuance than what the issuer must pay back at maturity.

n (semi-annualperiod) = 10

i (semi-annual rate= 5%

Cash flow	Table value	amount	Present value
Maturity value	0.6139 (Table B.1)	90,000	55,251
Interest (annuity)($90,000 x12% x ½)	7.7217 (Table B.3)	5,400	41,697
Price of bond			$96,948

Jan 1	Cash	$96,948
	Premium on bond payable		$6,948
	Bonds payable		$90,000
	Record issuance of bonds payable

(2) The market rate at the date of issuance is 12%.

Issue of the bond at par: - When the contract rate of the bond is equal to the market rate, then the bond is an issue at par.

n (semi-annualperiod) = 10

i (semi-annual rate= 6%

Cash flow	Table value	amount	Present value
Maturity value	0.5584 (Table B.1)	90,000	50,256
Interest (annuity)	7.3601 (Table B.3)	5,400	39,744
Price of bond			$90,000

Jan 1	Cash	$90,000
	Bonds payable		$90,000
	Record issuance of bonds payable

(3) The market rate at the date of issuance is 14%.

Issue of the bond at discount: -A discount on bonds payable occurs when a company issues bonds with a contract rate less than the market rate. This means the issue price is less than par value—the issuer gets less money at issuance than what the issuer must pay back at maturity.

n (semi-annualperiod) = 10

i (semi-annual rate= 7%

Cash flow	Table value	amount	Present value
Maturity value	0.5083 (Table B.1)	90,000	45,747
Interest (annuity)	7.0236 (Table B.3)	5,400	37,927
Price of bond			$83,674

Jan 1	Cash	$83,674
	Discount on bond payable	$6,326
	Bonds payable		$90,000
	Record issuance of bonds payable