Chapter 10: Q6DQ (page 473)
Question: What are the contract rate and the market rate for bonds?
Answer
The contract rate is the rate of interest given by the bond issuer.
The market rate is the rate of interest that can be paid by the bond issuer and accepted by the bondholder.
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Question: Using the bond details in QS 10-2, confirm that the bonds’ selling price is approximately correct (within $100). Use present value tables B.1 and B.3 in Appendix B
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%.
Your business associate mentions that she is considering investing in corporate bonds currently selling at a premium. She says that since the bonds are selling at a premium, they are highly valued, and her investment will yield more than the going rate of return for the risk involved. Reply with a memorandum to confirm or correct your associate’s interpretation of premium bonds.
Refer to the bond details in Problem 10-5A.
Required
Refer to the bond details in Problem 10-2B, except assume that the bonds are issued at a price of $4,192,932.
Required
1. Prepare the January 1, 2017, journal entry to record the bonds’ issuance.
2. For each semiannual period, compute (a) the cash payment, (b) the straight-line premium amortization, and (c) the bond interest expense.
3.Determine the total bond interest expense to be recognized over the bonds’ life.
4. Prepare the first two years of an amortization table like Exhibit 10.11 using the straight-line method.
5. Prepare the journal entries to record the first two interest payments.
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