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Chapter 12: Q4SE_1 (page 656)

Bond prices depend on the market rate of interest, stated rate ofinterest,and time.

Requirements

1. Compute the price of the following 8% bonds of Country Telecom.

a. \(100,000 issued at 75.25

b. \)100,000 issued at 103.50

c. \(100,000 issued at 94.50

d. \)100,000 issued at 103.25

2. Which bond will Country Telecom have to pay the most to retire at maturity?Explain your answer.

Short Answer

Expert verified

Answer:

(a) $75,250 (b) $103,500 (c) $94,500 (d) $103,250

Step by step solution

01

Definition of bonds

Bonds are the loans issued by the company to the investors on which regularinterest payment are made by the company.

02

Price of the bonds

a. In this case, the bonds are issued at a discount

PriceofBonds=Facevalueofbond×rate=$100,000×75.25%=$75,250

b. In this case, the bonds are issued at a premium

PriceofBonds=Facevalueofbond×rate=$100,000×103.50%=$103,500

c. In this case, the bonds are issued at a discount

PriceofBonds=Facevalueofbond×rate=$100,000×94.50%=$94,500

d. In this case, the bonds are issued at a premium

PriceofBonds=Facevalueofbond×rate=$100,000×103.25%=$103,250

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Most popular questions from this chapter

What type of account is Premium on Bonds Payable? What is its normal balance? Is it added to or subtracted from the Bonds Payable account to determine the carrying amount?

Determining the present value of bonds payable and journalizingusing the effective-interest amortization methodRelaxation, Inc. is authorized to issue 7%, 10-year bonds payable. On January 1, 2018,when the market interest rate is 12%, the company issues $300,000 of the bonds. Thebonds pay interest semiannually.

Requirements

1. How much cash did the company receive upon issuance of the bonds payable?(Round to the nearest dollar.)

2. Prepare an amortization table for the bond using the effective-interest method,through the first two interest payments (Round to the nearest dollar.)

3. Journalize the issuance of the bonds on January 1, 2018, and the first and secondpayments of the semiannual interest amount and amortization of the bonds onJune 30, 2018, and December 31, 2018. Explanations are not required.

Using the effective-interest amortization method

On December 31, 2018, when the market interest rate is 6%, Benson Realty issues

\(700,000 of 6.25%, 10-year bonds payable. The bonds pay interest semiannually. Benson

Realty received \)713,234 in cash at issuance.

Requirements

1. Prepare an amortization table using the effective interest amortization method for

the first two semiannual interest periods. (Round to the nearest dollar.)

2. Using the amortization table prepared in Requirement 1, journalize issuance of the

bonds and the first two interest payments.

Analyzing and journalizing bond transactions

On January 1, 2018, Nurses Credit Union (NCU) issued 8%, 20-year bonds payablewith 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 bepriced 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 bepriced 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 lastinterest payment has already beenrecorded.

Retiring bonds payable before maturity

CoastalView Magazineissued $600,000 of 15-year, 5% callable bonds payable on July

31, 2018, at 94. On July 31, 2021, CoastalViewcalled the bonds at 101. Assume annual

interest payments.

Requirements

1. Without making journal entries, compute the carrying amount of the bonds payable

at July 31, 2021.

2. Assume all amortization has been recorded properly. Journalize the retirement of

the bonds on July 31, 2021. No explanation is required.
See all solutions

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