On April 1, 2006, US Ultracom issued 7%, 10-year bonds payable with maturity val
ID: 2481342 • Letter: O
Question
On April 1, 2006, US Ultracom issued 7%, 10-year bonds payable with maturity value of $400,000. The bonds pay interest on March 31 and September 30, and US Ultracom amortizes premium and discount by the straight-line method. Requirements If the market interest rate is 6 1/2% when US Ultracom issues its bonds, will the bonds be priced at maturity (par) value, at a premium, or at a discount? Explain. If the market interest rate is 8% when US Ultracom issues its bonds will the bonds be priced at par, at a premium, or at a discount? Explain. Assume that the issue price of the bonds is 101. Journalize the following bonds payable transactions: Issuance of the bonds on April 1, 2006. Payment of interest and amortization of premium on September 30 2006. Accrual of interest and amortization of premium on December 31, 2006. Payment of interest and amortization of premium on March 31, 2007.Explanation / Answer
1) As the market rate of interest is less than the interest offered by the bond, the bonds will be prices at a premium. This is because the investors are getting better return by investing in the bonds of the company than the return they would have obtained from the market.
2) As the market rate of interest is greater than the interest offered by the bonds, the bonds will be priced at discount. This is because the company will have to compensate the investors as the bonds are offering a lower return than to the bond holders than that prevailing in the market.
3)
Bond premium = (101/100) x $400000 -$400000 = $4000
Half-yearly amortization of premium (straight line method) = $4000 / 20 = $200
Half yearly interest = $400000 x 7% x (1/2) = $14000
Date Account Title and explanation Debit($) Credit($) 2006 Apr-01 Cash 404000 Premium on bonds payable 4000 Bonds payable 400000 Sep-30 Interest Expense 13800 Premium on bonds payable 200 Cash 14000 Dec-31 Interest Expense 13800 Premium on bonds payable 200 Interest payable 14000 2007 Mar-31 Interest Expense 13800 Premium on bonds payable 200 Cash 14000Related Questions
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