E10-12. Assume that the following are independent situations recently reported i
ID: 2530300 • Letter: E
Question
E10-12. Assume that the following are independent situations recently reported in the Wall Street Journal. 1·General Electric (GE) 7% bonds, maturing January 28, 2018, were issued at 111.12. 2Boeing 7% bonds, maturing September 24, 2032, were issued at 99.08. Instructions (a) Were GE and Boeing bonds issued at a premium or a discount? (b) Explain how bonds, both paying the same contractual interest rate, could be issued at different prices. (e) Prepare the journal entry to record the issue of each of these two bonds, assuming each company issued S800,000 of bonds in total. E10-20 Sehr Company issued $500,000, 6%, 30-year bonds on January 1, 2017, at 103. Interest is payable annually on January 1. Sehr uses straight-line amortization for bond premium or discount Instructions Prepare the journal entries to record the following events. (a) The issuance of the bonds. (b) The accrual of interest and the premium amortization on December 31, 2017 (c) The payment of interest on January 1, 201s. (d) The redemption of the bonds at maturity, assuming interest for the last interest period has been paid and recorded.Explanation / Answer
Q10-12.
Req a. GE Bonds have been issued at a premium. Total premium per bond in this case is as follows: (111.12- 100): $11.12 per bond.
Boeing Bond has been issued at discount. The discount on bond is as (100-99.08): $ 0.92 per bond.
Req b: The Bonds stating the same interests rate can be issued at different prices due to the reason the market rate prevalent on the date of issue. Therefore, the situation should have been as such:
When the GE bonds have been issued, the Stated rate of interest has been 7% and the rate of interest prevalent in the market is lesser. Then the investor will get higher future income in the form of interest. For earning higher income, they will be ready to pay more then the Par value.
When Boeing Bonds has been issued, there may be a possibility that the interest rate prevalent in the market is higher than the interest rate stated in the bonds. Therefore, the investor will be ready to forego the income for which shall be compensated through reduced issue price.
Req c: Journal entries:
Journal entries: S.no. Accounts title and explanations Debit $ Credit $ a Cash Account Dr. (800,000*111.12%) 888,960 8% GE bonds payable 800,000 Premium on bonds payable 88960 b. Cash Account Dr. (800,000*99.08) 792640 Discount on bonds payabe Dr. 7360 8% Boeing Bonds payable 800000Related Questions
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