P11-33A Analyzing and journalizing bond transactions Le On January 1 , 2016, Tac

Question

P11-33A Analyzing and journalizing bond transactions Le On January 1 , 2016, Tacher 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. Requirements 1. If the market interest rate is 6% when TCU issues its bonds, will the bonds be 2. If the market interest rate is 9% when TCU issues its bonds, will the bonds be DP priced at face value, at a premium, or at a discount? Explain. priced at face value, at a premium, or at a discount? Explain. The issue price of the bonds is 96. Journalize the following bond transactions: à. Issuance of the bonds on January 1, 2016. b. Payment of interest and amortization on June 30, 2016. c. Payment of interest and amortization on December 31, 2016. d. Retirement of the bond at maturity on December 31, 2035 3.

Explanation / Answer

1 The 8% bonds will be issued at a discount if the market interest rate is 6%. They are unattractive in this market, so investors will pay less than the maturity value to acquire them. 2 The 8% bonds will be issued at a premium if the market interest rate is 9%. They are attractive in this market, so investors will pay more than the maturity value to acquire them. 3 Cash 384000 Discount on bonds payable 16000 Bonds payable 400000 30-Jun Interest expense 16400 Discount on bond payable 16000*1/40 400 Cash ($400,000 × 0.08 × 6/12) 16000 31-Dec Interest expense 16400 Discount on bond payable 16000*1/40 400 Cash ($400,000 × 0.08 × 6/12) 16000 31/12/35 Bonds Payable 400000 Cash 400000 Retired Bonds

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