Hartford Research issues bonds dated January 1 that pay inte

Hartford Research issues bonds dated January 1 that pay interest semiannually on June 30 and December 31. The bonds have a $39,000 par value and an annual contract rate of 8%, and they mature in 10 years.

Required:

Consider each of the following three separate situations.

1. The market rate at the date of issuance is 6%.

(a) Complete the below table to determine the bonds\' issue price on January 1.

(b) Prepare the journal entry to record their issuance.

2. The market rate at the date of issuance is 8%.

(a) Complete the below table to determine the bonds\' issue price on January 1.

(b) Prepare the journal entry to record their issuance.

3. The market rate at the date of issuance is 10%.

(a) Complete the below table to determine the bonds\' issue price on January 1.

(b) Prepare the journal entry to record their issuance.

Solution

Principal 39,000 interest 1560 Market interest rate 3% periods to maturity 20 issue price      44,802 1) Calculation of bond issue price Where i= 3.00% t= 20 principal * PV of $1 at 3% for 20 yrs = 39,000 * 0.55368        =      21,594 interest * PV of ordinary annuity at 3%= 1560 * 14.87747 =      23,209 bond issue price      44,802 Journal entry Date Account titles & explanations Debit Credit 1-Jan cash       44,802 premium on bonds         5,802 bonds payable 39,000 2) Principal 39,000 interest 1560 Market interest rate 4% periods to maturity 20 issue price      39,000 2) Calculation of bond issue price Where i= 4.00% t= 20 principal * PV of $1 at 3% for 20 yrs = 39,000 * 0.45639        =      17,799 interest * PV of ordinary annuity at 3%= 1560 * 13.59003 =      21,200 bond issue price      39,000 Journal entry Date Account titles & explanations Debit Credit 1-Jan cash       39,000 bonds payable 39,000 Principal 39,000 interest 1560 Market interest rate 5% periods to maturity 20 issue price      34,140 3) Calculation of bond issue price Where i= 5.00% t= 20 principal * PV of $1 at 3% for 20 yrs = 39,000 * 0.37689        =      14,699 interest * PV of ordinary annuity at 3%= 1560 * 12.46221 =      19,441 bond issue price      34,140 Journal entry Date Account titles & explanations Debit Credit 1-Jan cash       34,140 Discount on bonds          4,860 bonds payable 39,000