Question

Analyzing and journalizing bond transactions

On January 1, 2018, Nurses Credit Union (NCU) issued 8%, 20-year bonds payablewith 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 bepriced 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 bepriced 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 lastinterest payment has already beenrecorded.

Short answer

The bonds are priced at a discount. Cash debited by $552,000, discount on bond debited by $48,000 and bond payable credited by $600,000.

Step-by-step solution

 Definition of the bonds

A bond is a type of long-term debt that companies used to arrange the funds to meet cash requirements.

Journal entries

Date	Particulars	Debit	Credit
January 1, 2018	Cash	$552,000
	Discount on Bonds	$48,000
	Bonds Payable		$600,000
	(Being entry for the issue of the bonds)
June 30, 2018	Interest Expense	$25,200
	Discount on Bonds		$1,200
	Cash		$24,000
	(Being entry for the payment of interest)
December 31, 2018	Interest Expense	$25,200
	Discount on Bonds		$1,200
	Cash		$24,000
	(Being entry for the payment of interest)
December 31, 2037	8% Bonds Payable	$600,000
	Cash		$600,000
	(Being entry for the retirement of bonds)