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Chapter 12: 7TI (page 645)
On December 31, 2018, when the market interest rate is 8%, Arnold Corporation issues $200,000 of 6%, 10 year-bonds payable. The bonds pay interest semiannually. Determine the present value of the bonds at issuance.
the present value of the bonds at issuance is $216,652.
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When a bond is issued, what is its present value?
Analyzing and journalizing bondtransactions
On January1, 2018, Doctors Credit Union (DCU) issued 7%, 20-year bondspayable with face value of $200,000. The bonds pay interest on June 30 andDecember 31.
Requirements
1. If the market interest rate is 5% when DCU issues its bonds, will the bonds bepriced at face value, at a premium, or at a discount? Explain.
2. If the market interest rate is 8% when DCU issues its bonds, will the bonds bepriced at face value, at a premium, or at a discount? Explain.
3. The issue price of the bonds is 93. Journalize the following bond transactions:
a. Issuance of the bonds on January 1, 2018.
b. Payment of interest and amortization on June 30, 2018.
c. Payment of interest and amortization on December 31, 2018.
d. Retirement of the bond at maturity on December 31, 2037, assuming the lastinterest payment has already been recorded.
Determine whether the following bonds payable will be issued at face value, at a premium, or at a discount:
3. A 10% bonds payable is issued when the market interest rate is 8%.
4. A 10% bonds payable is issued when the market interest rate is 10%.
5. A 10% bonds payable is issued when the market interest rate is 12%.
Analyzing alternative plans to raise money
SB Electronics is considering two plans for raising \(4,000,000 to expand operations.
Plan A is to issue 9% bonds payable, and plan B is to issue 500,000 shares of common
stock. Before any new financing, SB Electronics has net income of \)350,000 and
300,000 shares of common stock outstanding. Management believes the company can
use the new funds to earn additional income of $700,000 before interest and taxes.
The income tax rate is 30%. Analyze the SB Electronics situation to determine which
plan will result in higher earnings per share. Use Exhibit 12-6 as a guide.
In regard to a bond discount or premium, what is the straight-line amortization
method?
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