PROBLEMC2o PoiNTS Assume that on April 1, 2008, Roland Corp. issues 8%, 10-year

Question

PROBLEMC2o PoiNTS Assume that on April 1, 2008, Roland Corp. issues 8%, 10-year bonds payable with a maturity value of $400,000. The bonds pay interest on March 31 and September 30, and Roland amortizes any premium and discount by the straight-line method. Roland's fiscal year-end is December 31. Requirements 1. If the market interest rate is 7 1/2% when Roland issues its bonds, will the bonds be priced at maturity value, at a premium, or at a discount? Explain. 2. If the market interest rate is 9% when Roland issues its bonds, will the bonds be priced at maturity, at a premium, or at a discount? Explain. lowing bonds payable transactions: a. Issuance of the bonds on April 1,2008. b. Payment of interest and amortization of premium on Septem- 3. Assume that the issue price of the bonds is 101. Journalize the fol- ber 30, 2008. c. Accrual of interest and amortization of premium on December 31, d. Payment of interest and amortization of premium on March 31, Rean 2 2008. 2009

Explanation / Answer

1. If the market Interest rate is 7.5%, then the present value of Bonds is to be calculated on the basis of market rate, So, the bond would be values at Discount.

Present Value of Bonds=($400,000*0.08*6.86 (7.50%, 10 Years)+$400,000*0.49

=$413,728.16

2. If the market Interest rate is 9%, then the present value of Bonds is to be calculated on the basis of market rate, So, the bond would be values at Premium.

Present Value of Bonds=($400,000*0.09*6.42 (9.00%, 10 Years)+$400,000*0.42

=$374,329.37

3.

Date Particulars L.F Dr ($) Cr ($) April 1, 2008 Bank A/c Dr 404000          To 8% Bonds A/c 400000          To Security Premium A/c 4000 Sep 30, 2008 Interest A/c Dr 8000            To Bank A/c 8000 ($400000*0.08*3/12) Dec 31, 2008 Interest A/c Dr 8000             To Interest Payable A/c 8000 ($400000*0.08*3/12) Mar 31, 2009 Interest A/c Dr 8000 ($400000*0.08*3/12) Interest Payable A/c 8000            To Bank A/c 16000

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