On January1, 2016, Teacher Credit Union (TCU) issued 8 %, 20-year bonds payable

Question

On January1, 2016, Teacher Credit Union (TCU) issued 8 %, 20-year bonds payable with face value of $ 400,000. The bonds pay interest on June 30 and December 31.

Requirement 1.

If the market interest rate is 6 % when TCU issues itsbonds, will the bonds be priced at face value, at apremium, or at a discount? Explain.

The 8 % bonds issued when the market interest rate is 6 % will be priced at (select correct answer: a discount, a premium, or face value). They are (select correct answer: attractive or unattractive) in this market, so investors will pay (select correct answer: face value, less than face value or more than face value) to acquire them.

Requirement 2.

If the market interest rate is 9 % when TCU issues itsbonds, will the bonds be priced at facevalue, at apremium, or at adiscount? Explain.

The 8 % bonds issued when the market interest rate is 9 % will be priced at (select correct answer: a discount, a premium or face value). They are (select correct answer: attractive or unattractive) in thismarket, so investors will pay (select correct answer: face value, less than face value or more than face value) to acquire them.

Requirement 3. The issue price of the bonds is 96

.

Journalize the bond transactions. (Assume bonds payable are amortized using thestraight-line amortization method. Record debitsfirst, then credits. Select explanations on the last line of the journal entry. Round your answers to the nearest wholedollar.)

a. Journalize the issuance of the bonds on January 1, 2016

Date

Accounts and Explanation

Debit

Credit

     

     

     

b. Journalize the payment of interest and amortization on June 30, 2016

Date

Accounts and Explanation

Debit

Credit

     

     

     

c. Journalize the payment of interest and amortization on December 31, 2016

Date

Accounts and Explanation

Debit

Credit

     

     

     

d. Journalize the retirement of the bond at maturity on December 31, 2035 (Assume interest through December 31, 2035has already been paid and recorded.)

Date

Accounts and Explanation

Debit

Credit

     

     

     

Date

Accounts and Explanation

Debit

Credit

     

     

     

Explanation / Answer

1) The 8 % bonds issued when the market interest rate is 6% will be priced at a premium. They are attractive in this market , so investor will pay more than face value to acquire them 2) The 8 % bonds issued when the market interest rate is 9% will be priced at a discount. They are unattractive in this market , so investor will pay less than face value to acquire them 3) Journalising issue of bonds at 96 Debit Credit a) Cash 384000 Discount on issue of bonds 16000              8 % Bonds Payable 400000 Bonds are issued at discount , Issue price is 96 Issue amount can be calculated as = Face Value x 96 % = 400000 x 96 %, = 384000 Discount = Face Value - Issue price = 400000 - 384000, = 16000 b) Interest expense 16400              Cash 16000               Discount on issue of bonds 400 Discount on bonds is to be amortized in 20 years that is = 16000 / 20 year , =800 per year Half yearly amortization wil be = 800 / 2 = 400 per half year Interest amount to be paid in cash = Face Value x 8 % x 1/2 year =400000 x 8% x 1/2 = 16000 c) Interest expense 16400              Cash 16000               Discount on issue of bonds 400 Interest expense recorded Explanation same as above d) 8 % Bonds Payable 400000              Cash 400000 Bonds redeemed at maturty Face value will be redeemed at maturity

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

---

---

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