Q3SE - Horngren'S Financial And Managerial Accounting

Question

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%.

Step-by-Step Solution

Answer

Discount (b) premium (c) face value (d) discount

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.