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Chapter 12: Q34PGA_1 (page 664)

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

Expert verified

The bonds are priced at a premium.

Step by step solution

01

Definition of the bonds

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

02

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.

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Most popular questions from this chapter

Reporting liabilities

At December 31, MediStat Precision Instruments owes \(52,000 on Accounts

Payable, Salaries Payable of \)12,000, and Income Tax Payable of \(10,000. MediStat

also has \)300,000 of Bonds Payable that were issued at face value that require

payment of a \(35,000 installment next year and the remainder in later years. The

bonds payable require an annual interest payment of \)4,000, and MediStat still

owes this interest for the current year. Report MediStat’s liabilities on its classified

balance sheet on December 31, 2018.

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.

What type of account is Discount on Bonds Payable? What is its average balance? Is it added to or subtracted from the Bonds Payable charge to determine the carrying amount?

Reporting current and long-term liabilities

Pediatric Dispensary borrowed \(390,000 on January 2, 2018, by issuing a 15% serial

bond payable that must be paid in three equal annual installments plus interest for the

year. The first payment of principal and interest comes due January 2, 2019. Complete

the missing information. Assume the bonds are issued at face value.

December 31

2018 2019 2020

Current Liabilities:

Bonds Payable \) \( \)

Interest Payable

Long-term Liabilities:

Bonds Payable

Using the effective-interest amortization method

On December 31, 2018, when the market interest rate is 8%, Biggs Realty issues

\(450,000 of 5.25%, 10-year bonds payable. The bonds pay interest semiannually. The

present value of the bonds at issuance is \)365,732.

Requirements

1. Prepare an amortization table using the effective interest amortization method for

the first two semiannual interest periods. (Round to the nearest dollar.)

2. Using the amortization table prepared in Requirement 1, journalize issuance of the

bonds and the first two interest payments.

See all solutions

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