Chapter 12: Q19RQ (page 655)
What is an annuity?
Constant amount of money received over the period is known as annuity.
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Determining bond prices and interest expense
Jones Company is planning to issue $490,000 of 9%, five-year bonds payable to
borrow for a major expansion. The owner, Shane Jones, asks your advice on some
related matters.
Requirements
1. Answer the following questions:
a. At what type of bond price Jones Company will have total interest expense
equal to the cash interest payments?
b. Under which type of bond price will Jones Company’s total interest expense be
greater than the cash interest payments?
c. If the market interest rate is 12%, what type of bond price can Jones Company
expect for the bonds?
2. Compute the price of the bonds if the bonds are issued at 89.
3. How much will Jones Company pay in interest each year? How much will Jones
Company’s interest expense be for the first year?
What is an amortization schedule?
Analyzing and journalizing bondtransactions
On January1, 2018, Doctors Credit Union (DCU) issued 7%, 20-year bondspayable with face value of $200,000. The bonds pay interest on June 30 andDecember 31.
Requirements
1. If the market interest rate is 5% when DCU issues its bonds, will the bonds bepriced at face value, at a premium, or at a discount? Explain.
2. If the market interest rate is 8% when DCU issues its bonds, will the bonds bepriced at face value, at a premium, or at a discount? Explain.
3. The issue price of the bonds is 93. Journalize the following bond transactions:
a. Issuance of the bonds on January 1, 2018.
b. Payment of interest and amortization on June 30, 2018.
c. Payment of interest and amortization on December 31, 2018.
d. Retirement of the bond at maturity on December 31, 2037, assuming the lastinterest payment has already been recorded.
Determining bond prices and interest expense
Jones Company is planning to issue $490,000 of 9%, five-year bonds payable to
borrow for a major expansion. The owner, Shane Jones, asks your advice on some
related matters.
Requirements
1. Answer the following questions:
a. At what type of bond price Jones Company will have total interest expense
equal to the cash interest payments?
b. Under which type of bond price will Jones Company’s total interest expense be
greater than the cash interest payments?
c. If the market interest rate is 12%, what type of bond price can Jones Company
expect for the bonds?
2. Compute the price of the bonds if the bonds are issued at 89.
3. How much will Jones Company pay in interest each year? How much will Jones
Company’s interest expense be for the first year?
Schmidt Company issued $100,000, 4%, 10-year bonds payable at 98 on January 1, 2018.
6. Journalize the issuance of the bonds payable on January 1, 2018.
7. Journalize the payment of semiannual interest and amortization of the bond discount or premium (using the straight-line
amortization method) on July 1, 2018.
8. Assume the bonds payable was instead issued at 106. Journalize the issuance of the bonds payable and the payment of the
first semiannual interest and amortization of the bond discount or premium.
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