Computing bond price and recording issuance P1 Flagstaff Systems issues bonds da
ID: 2390988 • Letter: C
Question
Computing bond price and recording issuance P1 Flagstaff Systems issues bonds dated January 1, 2016, that pay June 30 and December 31. The bonds have a $90,000 par value and an annual contract rate interest semiannually on of 12%, and they mature in five years. Required For each of the following three separate situations,(a) determine the bonds' issue price on January 1 2013 and (b) prepare the journal entry to record their issuance 1. 2. The market rate at the date of issuance is 10%. The market rate at the date of issuance is 14% BRIEF EXPLANATION REQUIRED FOR THE TWO JOURNAL ENTRIESExplanation / Answer
Assumption "Bond is repayable at par i.e $ 90,000
1. When Market Interest Rate is 10%
(a) Issue Price of the Bond:-
Par Value of the Bond = $90,000
Maturity= 5 Years
Interest Rate is 12% payable semi annualy, so interest amount = 12% of $90,000 *6/12
=$ 5,400
Bond's Issue Price = Present Vlaue = PVAF (5%,10) * $5,400 + PVIF (5%,10) * $ 90,000
= 7.7217 * $ 5400 + 0.6139* $ 90,000
= $ 41,697 + $ 55,251
=$ 96,948
(b) Journal Entry:- On January 1 2016 at the time of issuance
Bank/ Cash......................................Debit $96,948
12% Bonds......................................Credit $96,948
Also the Interest Expense for 1st Year would be 10% of $96,948 = $ 9,695
2. When Market Interest Rate is 14%
(a) Issue Price of the Bond:-
Par Value of the Bond = $90,000
Maturity= 5 Years
Interest Rate is 12% payable semi annualy, so interest amount = 12% of $90,000 *6/12
=$ 5,400
Bond's Issue Price = Present Value =PVAF (7%,10) * $5,400 + PVIF (7%,10) * $ 90,000
= 7.0236 * $ 5400 + 0.5083 * $ 90,000
= $ 37,927 + $ 45,747
=$ 83,674
(b) Journal Entry:- On January 1 2016 at the time of issuance
Bank/ Cash......................................Debit $ 83,674
12% Bonds......................................Credit $ 83,674
Also the Interest Expense for 1st Year would be 14% of $83,674 = $ 11,714
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