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Q3SE

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Horngren'S Financial And Managerial Accounting
Found in: Page 655

Short Answer

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

of 7.75%.

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

See the step by step solution

Step by Step Solution

Step 1: Definition of bonds payable issue at a discount

Bond issued at discount is the situation when the bond issued by the company less than the face value of the bond.

Step 2: Issue the bonds payable

  1. In this case, the bond is issued at a discount because the market interest rate of the bonds payable is greater than the stated bond rate. Hence, the bonds payable is issued at a discount.
  2. In this case, the bonds are issued at a premium because the stated interest rate is greater than the market interest.
  3. In this case, the bonds are issued at face value because the market interest rate and the stated interest rate are the same. Hence the bonds payable is issued at face value.
  4. In this case, the bonds payable is issued at a discount because the stated interest rate is less than the market interest rate. Hence, the bonds payable is issued 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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