Stowers Research issues bonds dated January 1, 2011, that pay interest semiannua

Question

Stowers Research issues bonds dated January 1, 2011, that pay interest semiannually on June 30 and December 31. The bonds have a $20,000 par value and an annual contract rate of 10%, and they mature in 10 years.1. The market rate at the date of issuance is 8%. (a) Determine the bonds' issue price on January 1, 2011.(b) Prepare the journal entry to record their issuance.2. The market rate at the date of issuance is 10%. (a) Determine the bonds' issue price on January 1, 2011.(b) Prepare the journal entry to record their issuance.

Explanation / Answer

1. Get the PV of 37,000, at Market rate of 5% (semi annual) for 20 periods. Then get the PV of an Annuity of 2,220 (Face x 6% - contract rate, semi annual), also at 5%, N 20 (a) PV of Face Value - 13,945 + PV Annuity - 27,666 = 41,611 Issue Price of Bond (b) DR Cash 41,611 CR Bonds Payable 37,000 CR Bond Premium 4,611 2. Exactly the same method, but using 6% for Market rate. (Sold at Par) 3. Exactly the same method, but using 7% for Market rate. (Sold at a Discount)

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