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Chapter 12: Q34PGA_1 (page 664)

Analyzing and journalizing bond transactions

On January 1, 2018, Nurses Credit Union (NCU) issued 8%, 20-year bonds payable

with face value of $600,000. The bonds pay interest on June 30 and December 31.

Requirements

1. If the market interest rate is 7% when NCU issues its bonds, will the bonds be

priced at face value, at a premium, or at a discount? Explain.

2. If the market interest rate is 9% when NCU issues its bonds, will the bonds be

priced at face value, at a premium, or at a discount? Explain.

3. The issue price of the bonds is 92. 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 last

interest payment has already been recorded.

Short Answer

Expert verified

The bonds are priced at a premium.

Step by step solution

01

Definition of the bonds

A bond is a type of long-term debt that large companies issue to fulfil cash requirements.

02

The bonds will be priced at

If the market interest rate is 7%, the bonds will issue on the premium because the stated rate of the bonds is greater than the market interest rate. Hence, the bonds will be priced at a premium.

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Most popular questions from this chapter

Analyzing and journalizing bond transactions

On January 1, 2018, Electricians Credit Union (ECU) issued 8%, 20-year bondspayable with face value of $400,000. The bonds pay interest on June 30 andDecember 31. The issue price of the bonds is 104.

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 last interestpayment has already been recorded.

Schmidt Company issued $100,000, 4%, 10-year bonds payable at 98 on January 1, 2018.

6. Journalize the issuance of the bonds payable on January 1, 2018.

7. Journalize the payment of semiannual interest and amortization of the bond discount or premium (using the straight-line

amortization method) on July 1, 2018.

8. Assume the bonds payable was instead issued at 106. Journalize the issuance of the bonds payable and the payment of the

first semiannual interest and amortization of the bond discount or premium.

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.

Analyzing and journalizing bond transactions

On January 1, 2018, Educators Credit Union (ECU) issued 8%, 20-year bonds payablewith face value of $1,000,000. These bonds pay interest on June 30 and December 31.The issue price of the bonds is 109.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.

Analyzing and journalizing bond transactions

On January 1, 2018, Educators Credit Union (ECU) issued 8%, 20-year bonds payablewith face value of $1,000,000. These bonds pay interest on June 30 and December 31.The issue price of the bonds is 109.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.
See all solutions

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