Analyzing and journalizing bond transactions: On March 1, 2011, Professor Credit

Question

Analyzing and journalizing bond transactions: On March 1, 2011, Professor Credit Union (PCU) issued 6%, 20 year bond payable with maturity value of $90,000.The bonds pay interest on February 28 and August 31. PCU amortizes bond premium and discount by the straight line method. REQUIREMENTS: 1) If the market interest rate is 5%, when PCU issues its bonds, will the bonds be priced at maturity (par) value, at a premium, or at a discount? 2) If the market interest rate is 7% when PCU issues its bonds, will the bonds be priced at par, at a premium, or at a discount"? 3) The issue price of the bonds is 97. Journalize the following bond transactions: (a) Issuance of the bonds on March 1, 2011 (b) Payment of interest and amortization of discount on August 31, 2011. (c) Accrual of interest and amortization of discount on December 21, 2011. (d) Payment of interest and amortization of discount on february 28, 2012.

Explanation / Answer

REQUIREMENTS: 1) If the market interest rate is 5%, when PCU issues its bonds, will the bonds be priced at maturity (par) value, at a premium, or at a discount? Answer: Premium 2) If the market interest rate is 7% when PCU issues its bonds, will the bonds be priced at par, at a premium, or at a discount"? Answer: Discount 3) The issue price of the bonds is 97. Journalize the following bond transactions: (a) Issuance of the bonds on March 1, 2011 90,000*.97 = 87,300 Debit: Cash 87,300 Debit: Discount on bonds payable 2,700 Credit: Bonds payable 90,000 (b) Payment of interest and amortization of discount on August 31, 2011. (2700/20)*.5 = 67.50; 90,000*.06*.5 = 2700 Debit: Interest expense 2767.50 Credit: Cash 2700 Credit: Discount on bonds payable 67.50 (c) Accrual of interest and amortization of discount on December 21, 2011. (2700/20)*.5*4/6 = 45; 90,000*.06*.5*4/6 = 1800 Debit: Interest expense 1845 Credit: bond interest payable 1800 Credit: Discount on bonds payable 45 (d) Payment of interest and amortization of discount on february 28, 2012. 2767.50 – 1845 = 922.50 Debit: Interest expense 922.50 Debit: bond interest payable 1800 Credit: Cash 2700 Credit: Discount on bonds payable 22.50

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