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Horngren'S Financial And Managerial Accounting
Found in: Page 664

Short Answer

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.

The bonds are priced at a discount.

See the step by step solution

Step by Step Solution

Step 1:  Definition of the bonds

A bond is a legal obligation which company need to pay within the agreed time. It is recorded as the long term liability.

Step 2: The bonds will be priced at

If the market interest rate is 9%, then the bonds are priced at a discount because the market interest rate is greater than the state interest rate. Hence the bonds are priced at a discount.

Most popular questions for Business-studies Textbooks

Describing bonds, journalizing transactions for bonds payable using the straight-line amortization method, and journalizing transactions for a mortgage payable

This problem continues the Canyon Canoe Company situation from Chapter 11. Canyon Canoe Company is considering raising additional capital for further expansion. The company wants to finance a new business venture into guided trips down the Amazon River in South America. Additionally, the company wants to add another building on their land to offer more services for local customers. Canyon Canoe Company plans to raise the capital by issuing $210,000 of 7.5%, six-year bonds on January 2, 2020. The bonds pay interest semiannually on June 30 and December 31. The company receives $208,476 when the bonds are issued.

The company also issues a mortgage payable for $450,000 on January 2, 2020. The proceeds from the mortgage will be used to construct the new building. The mortgage requires annual payments of $45,000 plus interest for ten years, payable on December 31. The mortgage interest rate is 8%.

Requirements

1. Will the bonds issue at face value, a premium, or a discount?

2. Record the following transactions. Include dates and round to the nearest dollar. Omit explanations.

a. Cash received from the bond issue.

b. Cash received from the mortgage payable.

c. Semiannual bond interest payments for 2020. Amortize the premium or discount using the straight-line amortization method.

d. Payment on the mortgage payable for 2020.

3. Calculate the total interest expense incurred in 2020.

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