Q34PGA_3
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
VerifiedThe bonds are priced at a discount. Cash debited by $552,000, discount on bond debited by $48,000 and bond payable credited by $600,000.
A bond is a type of long-term debt that companies used to arrange the funds to meet cash requirements.
Date | Particulars | Debit | Credit |
January 1, 2018 | Cash | $552,000 |
|
| Discount on Bonds | $48,000 |
|
| Bonds Payable |
| $600,000 |
| (Being entry for the issue of the bonds) |
|
|
|
|
|
|
June 30, 2018 | Interest Expense | $25,200 |
|
| Discount on Bonds |
| $1,200 |
| Cash |
| $24,000 |
| (Being entry for the payment of interest) |
|
|
|
|
|
|
December 31, 2018 | Interest Expense | $25,200 |
|
| Discount on Bonds |
| $1,200 |
| Cash |
| $24,000 |
| (Being entry for the payment of interest) |
|
|
|
|
|
|
December 31, 2037 | 8% Bonds Payable | $600,000 |
|
| Cash |
| $600,000 |
| (Being entry for the retirement of bonds) |
|
|