Problem 14-1A?

Question

Stowers Research issues bonds dated January 1, 2005, that pay interest semiannually on June 30 and

December 31. The bonds have a $20,000 par value, an annual contract rate of 10%, and mature in 10

years.

Required

For each of the following three separate situations, (a) determine the bonds’ issue price on January

1, 2005, and (b) prepare the journal entry to record their issuance.

1. Market rate at the date of issuance is 8%.

2. Market rate at the date of issuance is 10%.

3. Market rate at the date of issuance is 12%.

Answer 1

The following symbols are used to designate present value factor:

(pv1, i, n) = present value of $1 discounted at i%, n periods from present

(pva, i, n) = present value of an annuity of $1 discounted at i%, for n periods

1. Market rate at the date of issuance is 8%.

(a) bonds’ issue price on January 1, 2005

The formula is $20,000(pv1, 4%, 20) + 5%($20,000)(pva, 4%, 20)

= $20,000(0.45639) + 5%($20,000)(13.59033)

= $9,127.80 + $13,590.33

= $22,718.13

(b) journal entry to record their issuance

Dr Cash $22,718.13

Cr Bond premium $2,718.13

Cr Bonds payable $20,000

2. Market rate at the date of issuance is 10%.

(a) bonds’ issue price on January 1, 2005

Since the market rate is the coupon rate, the bonds will be issued at face value, $20,000.

(b) journal entry to record their issuance

Dr Cash $20,000

Cr Bonds payable $20,000

3. Market rate at the date of issuance is 12%.

(a) bonds’ issue price on January 1, 2005

The formula is $20,000(pv1, 6%, 20) + 5%($20,000)(pva, 6%, 20)

= $20,000(0.31180) + 5%($20,000)(11.46992)

= $6,236 + $11,469.92

= $17,705.92

(b) journal entry to record their issuance

Dr Cash $17,705.92

Dr Bond discount $2,294.08

Cr Bonds payable $20,000

Note: Answers may differ depending on the no. of decimal points used. Pls refer to the PV tables given at the links.