PLEASE SHOW ALL WORK Cactus Construction sells $1,000,000 of 8% bonds on January

Question

PLEASE SHOW ALL WORK

Cactus Construction sells $1,000,000 of 8% bonds on January 1, 20XX. The bonds are unsecured but registered to the name of the purchaser. The bonds are due in 5 years, with interest payable annually at year-end.

1.Determine the value of the bonds if the market interest rate is 9%. Show the effect on the accounting equation (by account title) AND the journal entries at the date of issuance and at year-end.

PLEASE SHOW ALL WORK

2.Determine the value of the bonds if the market interest rate is 7%. Show the effect on the accounting equation (by account title) AND the journal entries at the date of issuance and at year-end.

PLEASE SHOW ALL WORK

Explanation / Answer

1. Coupon payment = 8%*1000000 =$80,000

Value of the bond= 80000/1.09 + 80000/1.09^2 + 80000/1.09^3 + 80000/1.09^4 + 80000/1.09^5 + 1000000/1.09^5 =$961,103.49

Discount = 1,000,000-961,103.49 =$38896.51

Cash $961,103.49 Debit

Discount on bonds payable $38896.51 Debit

Bonds payable $1,000,000 Credit

2.

Coupon payment = 8%*1000000 =$80,000

Value of the bond= 80000/1.07 + 80000/1.07^2 + 80000/1.07^3 + 80000/1.07^4 + 80000/1.07^5 + 1000000/1.07^5 =$1,041,001.97

Premium =$1,041,001.97 -1,000,000 = $41001.97

Cash   $1,041,001.97    Debit

Premium on bonds payable    $41001.97 Credit

Bonds payable $1,000,000 Credit

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.