Stowers Research issues bonds dated January 1, 2011, that pay interest semiannua

Question

Stowers Research issues bonds dated January 1, 2011, that pay interest semiannually on June 30 and December 31. The bonds have a $20,000 par value and an annual contract rate of 10%, and they mature in 10 years.1. The market rate at the date of issuance is 8%. (a) Determine the bonds' issue price on January 1, 2011.(b) Prepare the journal entry to record their issuance.2. The market rate at the date of issuance is 10%. (a) Determine the bonds' issue price on January 1, 2011.(b) Prepare the journal entry to record their issuance.

Explanation / Answer

The following symbols are used to designate present value factor: (pv1, i, n) = present value of $1 discounted at i%, n periods from present (pva, i, n) = present value of an annuity of $1 discounted at i%, for n periods The bonds are for 10 years, but interest is payable semi-annually, so there are 20 interest periods. 1. Market rate at the date of issuance is 10%. (a) bonds’ issue price on January 1, 2011 The formula is $37,000 (pv1, 5%, 20) + 6%($37,000 )(pva, 5%, 20) = $37,000 (0.37689) + 6%($37,000 )(12.46221) = $13,944.93 + $27,666.11 = $41,611.04 (b) journal entry to record their issuance Dr Cash $41,611.04 Cr Bond premium $4,611.04 Cr Bonds payable $37,000.00 2. Market rate at the date of issuance is 12%. (a) bonds’ issue price on January 1, 2011 Since the market rate is the coupon rate, the bonds will be issued at face value, $37,000. (b) journal entry to record their issuance Dr Cash $37,000 Cr Bonds payable $37,000 3. Market rate at the date of issuance is 14%. (a) bonds’ issue price on January 1, 2011 The formula is $37,000 (pv1, 7%, 20) + 6%($37,000 )(pva, 7%, 20) = $37,000 (0.25842) + 6%($37,000 )(10.59401) = $9,561.54 + $23,518.70 = $33,080.24 (b) journal entry to record their issuance Dr Cash $33,080.24 Dr Bond discount $3,919.76 Cr Bonds payable $37,000.00

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