Question

Analyzing and journalizing bond transactions

On January 1, 2018, Nurses Credit Union (NCU) issued 8%, 20-year bonds payable

with face value of $600,000. The bonds pay interest on June 30 and December 31.

Requirements

1. If the market interest rate is 7% when NCU issues its bonds, will the bonds be

priced at face value, at a premium, or at a discount? Explain.

2. If the market interest rate is 9% when NCU issues its bonds, will the bonds be

priced at face value, at a premium, or at a discount? Explain.

3. The issue price of the bonds is 92. 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 last

interest payment has already been recorded.

Short answer

The bonds are priced at a premium.

Step-by-step solution

Definition of the bonds

A bond is a type of long-term debt that large companies issue to fulfil cash requirements.

The bonds will be priced at

If the market interest rate is 7%, the bonds will issue on the premium because the stated rate of the bonds is greater than the market interest rate. Hence, the bonds will be priced at a premium.