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?
Savvy paid $3,500,000 at maturity.
Bond payable is known as a type of liability account. It contains the amount owed by the bond issuer.
Savvy has to pay the amount equal to the face value of the bond. Hence, the amount Savvy must pay is $3,500,000.
Using the effective-interest amortization method
On December 31, 2018, when the market interest rate is 8%, Biggs Realty issues
$450,000 of 5.25%, 10-year bonds payable. The bonds pay interest semiannually. The
present value of the bonds at issuance is $365,732.
1. Prepare an amortization table using the effective interest amortization method for
the first two semiannual interest periods. (Round to the nearest dollar.)
2. Using the amortization table prepared in Requirement 1, journalize issuance of the
bonds and the first two interest payments.
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.
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.
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