Q34PGA_2 - Horngren'S Financial And Managerial Accounting

Question

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.

Step-by-Step Solution

Answer

The bonds are priced at a discount.

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.