Determining bond prices
Bond prices depend on the market rate of interest, stated rate of interest, and time.
Determine whether the following bonds payable will be issued at face value, at a
premium, or at a discount:
a. The market interest rate is 8%. Idaho issues bonds payable with a stated rate
b. Austin issued 9% bonds payable when the market interest rate was 8.25%.
c. Cleveland’s Cars issued 10% bonds when the market interest rate was 10%.
d. Atlanta’s Tourism issued bonds payable that pay the stated interest rate of 8.5%. At
issuance, the market interest rate was 10.25%.
Discount (b) premium (c) face value (d) discount
Bond issued at discount is the situation when the bond issued by the company less than the face value of the bond.
At December 31, MediStat Precision Instruments owes $52,000 on Accounts
Payable, Salaries Payable of $12,000, and Income Tax Payable of $10,000. MediStat
also has $300,000 of Bonds Payable that were issued at face value that require
payment of a $35,000 installment next year and the remainder in later years. The
bonds payable require an annual interest payment of $4,000, and MediStat still
owes this interest for the current year. Report MediStat’s liabilities on its classified
balance sheet on December 31, 2018.
Weaver Corporation includes the following selected accounts in its general ledger on December 31, 2018:
Notes Payable (long-term) $ 75,000 Interest Payable (due next year) $ 720
Bonds Payable (long-term) 195,000 Sales Tax Payable 480
Accounts Payable 20,400 Premium on Bonds Payable 5,850
Salaries Payable 1,680 Estimated Warranty Payable 1,080
Prepare the liabilities section of Weaver Corporation’s balance sheet at December 31, 2018.
Determining bond amounts
Savvy Drive-Ins borrowed money by issuing $3,500,000 of 9% bonds payable
at 99.5. Interest is paid semiannually.
1. How much cash did Savvy receive when it issued the bonds payable?
2. How much must Savvy pay back at maturity?
3. How much cash interest will Savvy pay each six months?
Determining bond prices and interest expense
Jones Company is planning to issue $490,000 of 9%, five-year bonds payable to
borrow for a major expansion. The owner, Shane Jones, asks your advice on some
1. Answer the following questions:
a. At what type of bond price Jones Company will have total interest expense
equal to the cash interest payments?
b. Under which type of bond price will Jones Company’s total interest expense be
greater than the cash interest payments?
c. If the market interest rate is 12%, what type of bond price can Jones Company
expect for the bonds?
2. Compute the price of the bonds if the bonds are issued at 89.
3. How much will Jones Company pay in interest each year? How much will Jones
Company’s interest expense be for the first year?
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%.
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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