Problem 10-1B Computing bond price and recording issuance. (Round dollar amounts
ID: 2484042 • Letter: P
Question
Problem 10-1B
Computing bond price and recording issuance. (Round dollar amounts to the nearest whole dollar)
Flagstaff Systems issues bonds dated January 1, 2015, that pay interest semiannually on June 30 and December 31. The bonds have a $90,000 par value and an annual contract rate 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, 2015, and (b) prepare the journal entry to record their issuance.
1. The market rate at the date of issuance is 10%.
2. The market rate at the date of issuance is 12%.
3. The market rate at the date of issuance is 14%.
Check(1) Premium, $6,948 (3) Discount, $6,326
Explanation / Answer
Answer: Since the interest is paid semiannually, therefore, we will take half of the each interest rate and double of the maturity years.
1. The market rate at the date of issuance is 10%.
a) Calculation of bonds' issue price on January 1, 2015:
Price = 90000 *PVIF [(10%/2), (5 *2)] + (12%/2) * 90000* PVIFA [(10%/2), (5 *2)]
Price = 90000 *PVIF (5%,10) + 6% * 90000* PVIFA (5%,10 )
= 90000 *0.6139 + 0.06 *90000 * 7.7215
= 55251 + 41696.5
= $96947.5
= $96948
b) Journal entry to record the issuance:
Cash Dr. 96948
To bonds premium (96948 -90000)............6948
To bonds payable.................................. 90000
2. The market rate at the date of issuance is 12%.
a) Calculation of bonds' issue price on January 1, 2015:
Since the market rate is the coupon rate, the bonds will be issued at face value $90000
b) Journal entry to record the issuance:
Cash Dr. 90000
To bonds payable.........90000
3. The market rate at the date of issuance is 14%.
a) Calculation of bonds' issue price on January 1, 2015:
Price = 90000 *PVIF [(14%/2), (5 *2)] + (12%/2) * 90000* PVIFA [(14%/2), (5 *2)]
Price = 90000 *PVIF (7%,10) + 6% * 90000* PVIFA (7%,10 )
= 90000 * 0.5083 + 0.06 * 90000* 7.02351
= 45747 + 37926.954
= 83673.95
= 83674
b) Journal entry to record the issuance:
Cash Dr. 83674
Bond Discount(90000 - 83674) Dr. 6326
To bonds payable......................................90000
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