On January 1 2018 Doctors Credit Union DCU issued 7 20year b

On January 1, 2018, Doctors Credit Union (DCU) issued 7%, 20-year bonds payable with face value of $200,000. The bonds pay interest on June 30 and December 31.

Requirements

1. If the market interest rate is 5% when DCU 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 8% when DCU 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 93. 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.

On January 1, 2018, Doctors Credit Union (DCU) issued 7%, 20-year bonds payable with face value of $200,000. The bonds pay interest on June 30 and December 31 Read the requirements. Requirement 1. If the market interest rate is 5% when DCU issues its bonds, will the bonds be priced at face value, at a premium, or at a discount? Explain. The 7% bonds issued when the market interest rate is 5% will be priced at premium . They are attractivein this market, so investors will pay more than face value to acquire them. Requirement 2. If the market interest rate is 8% when DCU issues its bonds, will the bonds be priced at face value, at a premium, or at a discount? Explain. The 7% bonds issued when the market interest rate is 8% will be priced at la discount . They are unattractive in this market, so investors will pay less than face value to acquire them. Requirement 3. The issue price of the bonds is 93. Journalize the bond transactions. (Assume bonds payable are amortized using the straight-line amortization method. Record debits first, then credits. Select explanations on the last line of the journal entry. Round your answers to the nearest whole dollar.) a. Journalize the issuance of the bonds on January 1, 2018

Solution

Requirements 1) Premium since the contract or stated rate of 7% is more than the market rate of 5% , the bonds will said to be issued at premium 2) Discount since the contract or stated rate of interest of 7% is less than the market rate of 8% , the bonds will be said to be issued at Discount 3) Date Account titles & Explanations Debit Credit a) 1/1/2018 Cash (200000*.93) 186000 Discount on bonds 14000 bonds payable 200,000 b) 6/30/2018 interest expense 7350 Discount on bonds (14000/40) 350 cash (200000*3.5%) 7000 c) 12/31/2018 interest expense 7,350 Discount on bonds 350 cash 7,000 d) 12/31/2037 Bonds payable 200,000 cash 200,000