Issuance of a Bond at Face Value On January 1, 2014, Whitefeather Industries iss

Question

Issuance of a Bond at Face Value

On January 1, 2014, Whitefeather Industries issued 1,600 $1,000 face value bonds. The bonds have a(n) five-year life and pay interest at the rate of 8%. Interest is paid semiannually on July 1 and January 1. The market rate of interest on January 1 was 8%. Use the present value tables that may be found by clicking on the Present Value button.

Required:

1. Calculate the issue price of the bonds and record the issuance of the bonds on January 1, 2014.

Round your answer to the nearest $1,000. For example, $296,987 would be entered as $297,000.
$

Identify and analyze the effect of the issuance of the bonds on January 1, 2014.

How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.

2. How would the issue price have been affected if the market rate of interest had been higher than 8%.
- Select your answer -Bonds would be issued at a discount.Bonds would be issued at a premium.Bonds would be issued at face value.Indeterminable without more information.Correct 1 of Item 4

3. Identify and analyze the effect of the payment of interest on July 1, 2014.

How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.

4. Calculate the amount of interest accrued on December 31, 2014. If required, round your answer to the nearest dollar.
$

Activity - Select your answer -OperatingInvestingFinancingInvesting and FinancingCorrect 1 of Item 2 Accounts - Select your answer -Cash Increase, Bonds Payable IncreaseCash Increase, Bonds Payable DecreaseCash Decrease, Bonds Payable IncreaseCash Decrease, Bonds Payable DecreaseCorrect 2 of Item 2 Statement(s) - Select your answer -Balance Sheet onlyIncome Statement onlyBalance Sheet and Income StatementCorrect 3 of Item 2

Explanation / Answer

1. The present value of one dollar at 4% at the end of 10 (5x2) terms is 0.676. The present value of an annuity of one dollar at 4% for 10 terms is 8.111

Hence the issue price of each bond is (40 x 8.111) + (1000 x 0.676) = 1000.44 or $ 1000 approx. The issue price and market price are same because the coupon rate and market interest rate is equal , i.e 8%.

The total issue price for 1000 bonds is $ 1600000.

Activity : Bond issue is an item of financing activity.

Accounting: Cash increase Bonds Payable increase

Financial Statements: Balance Sheet only to be affected by the issuance of the bonds. While Cash and Bonds Payable are Balane Sheet items.

In the accounting equation, an increase in asset(cash) would be balanced by an increase in liabilities (Bonds Payable)

2. If the market rate of interest had been higher than 8%, the bonds would have been issued at a discount.

3. Payment of interest

Activity Financing activity

Accounts; Interest expense increase$ 64,000, cash decrease$ 64,000

Statement: Both Balance Sheet and Income Statement, as cash is a balance sheet item, and interest expense is an item on the Income Statement.

4. Interest accrued on December 31 = $ 1,000 x 1,600 x 8% x 1/2 = $ 64,000

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