14- HOMEWORK - p1,2.5,610811 Help Save & Exit Check n Problem 14-1A Computing bo

Question

14- HOMEWORK - p1,2.5,610811 Help Save & Exit Check n Problem 14-1A Computing bond price and recording issuance LO C2, P1 Hartford Research issues bonds dated January 1, 2017, that pay interest semiannually on June 30 and December 31. The bonds have a . Table 82 Table 13 and Table 4 (Use $35,000 par value and an annual contract rate of 10%, and they mature in able places, and use the rounded table values in y ears appropriate factor(s) from the tables provided. Round all table values to 4 decimal calculations.) Required: Consider each of the following three separate situations. The market rate at the date of issuance is 8%. (a) Complete the below table to determine the bonds' issue price on January 1, 2017 (b) Prepare the journal entry to record their issuance. 2 The market rate at the date of issuance is 10%. (a) Complete the below table to determine the bonds' issue price on January 1, 2017 (b) Prepare the journal entry to record their issuance. 3. The market rate at the date of issuance is 12%. a) Complete the below table to determine the bonds'issue price on January 1, 2017 b) Prepare the journal entry to record their issuance. Complete this question by entering your answers in the tabs belovw equired IA Required 18 Required 2A Reauired 28 Reauired 3A Required 3 Prev 1of 16 Ill Next >

Explanation / Answer

Interest payable semi annually=1750

1.The market rate is 8%

The PV value of the bond needs to be calculated by using 8% as the discounting factor.

The PV of the bond= PV of the total interest paid+ PV of the amount payable on maturity.

Since, the interest is paid semi-annually, the number of times interest will be paid=20

The PV of the interest can be calculated by using PVOA table as the interest amount is similar in the nature of annuity of $1750 for 20 times. (We need to look at 4% column and 20 in n row for determing the annuity factor. The interest rate is taken 4% since the interest is paid semi annually).

So, PV of interest= 1750*9.818=$23783.08

PV of the amount payable on maturity= 35000*PV of factor 1 at (i=4%,n=20)

                                                                       =35000*0.4564= $15973.65

Hence, PV of the bond= $(23783.08+15973.65)

                                      =$39756.73

The PV of the bond is the bond’s issue price=$39756.73

Since, the bond bears interest rate at 10%, wheras market interest rate is 8%, the bond is issued at a premium of (39756.73-35000)=$4756.73

Jan 1,2017   Cash                      39756.73

                     Bonds Payable                        350000

                     Premium on bond Issue           4756.7

b.Since, the market interest rate is same as the bond interest rate, the bond will be issued at par i.e at $35,000

Journal Entry

Jan 1,2017 Cash 35000

Bonds Payable 35000

cThe market rate at the date of issue is 12%

PV of the interest payments= 1750*PVOA(i=6%,n=20)

                                               =1750*11.4699=20072.33

PV of the maturity amount=35000*PV(i=6%,n=20)

                                               =35000*0.3118=10913

PV of the bond/Issue price=20072.33+10913=30985.3

Since, the PV of the bond is less than facevalue, it is issued at a discount of $4014.68

Jounal entry

Jan 1,2017           Cash                                      30985.32

                           Discount on Bonds Payable 4014.68

                                     Bonds Payable                                  35000

         

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