Stowers Research issues bonds dated January 1 2011 that pay

Stowers Research issues bonds dated January 1, 2011, that pay interest semiannually on June 30 and December 31. The bonds have a $28,000 par value and an annual contract rate of 10%, and they mature in 10 years. Required: Consider each of the following three separate situations. (Use Table B.1, Table B.3) The market rate at the date of issuance is 8%. Determine the bonds\' issue price on January 1, 2011. (Round \"PV Factors\" to 4 decimal places, intermediate calculations and final answer to the nearest dollar amount. Omit the \"$\" sign in your response.) Issue price $ Prepare the journal entry to record their issuance. (Round \"PV Factors\" to 4 decimal places, intermediate calculations and final answers to the nearest dollar amount. Omit the \"$\" sign in your response.) Date General Journal Debit Credit Jan. 1 The market rate at the date of issuance is 10%. Determine the bonds\' issue price on January 1, 2011. (Round \"PV Factors\" to 4 decimal places, intermediate calculations and final answer to the nearest dollar amount. Omit the \"$\" sign in your response.) Issue price $ Prepare the journal entry to record their issuance. (Round \"PV Factors\" to 4 decimal places, intermediate calculations and final answers to the nearest dollar amount. Omit the \"$\" sign in your response.) Date General Journal Debit Credit Jan. 1 The market rate at the date of issuance is 12%. Determine the bonds\' issue price on January 1, 2011. (Round \"PV Factors\" to 4 decimal places, intermediate calculations and final answer to the nearest dollar amount. Omit the \"$\" sign in your response.) Issue price $ Prepare the journal entry to record their issuance. (Round \"PV Factors\" to 4 decimal places, intermediate calculations and final answers to the nearest dollar amount. Omit the \"$\" sign in your response.) Date General Journal Debit Credit Jan. 1

Solution

Answer 1 Bond issue price = Present value of bond + present value of interest payments Present value of 10 year bond at market interest rate of 8% = Par value of bond * PV Factor for 10 year @ 8% rate PV Factor = 1/(1+0.08)^10 = 0.463193 Present value of 10 year bond at market interest rate of 8% = 28000 * 0.463193 = $12969.40 Present value of semi annual interest payment of $1400 for 10 years at Market interest rate 8% p.a Total no.of semi annual interest payments for 10 years = 20 Semi annual Market Interest rate = 4% Present value of an ordinary annuity of 1 at 4% for 20 semi annual payment = PMT [(1 - (1/(1+r)^n)) / r ] PMT = amount of annuity payment = 1 r = interest rate = 0.04 n = number of periods = 20 Present value of an ordinary annuity of 1 at 4% for 20 semi annual payment = 1 [(1 - (1/(1+0.04)^20)) / 0.04 ] = 13.59033 Present value of interest payment = $1400 *13.59033 = $19026.46 Bonds issue price = 12969.40 + 19026.46 = $31996 Journal Entries Date Account Title Debit Credit Jan.1,2011 Cash        31,996 Bonds payable        28,000 Premium on bonds           3,996 Answer 2 As the market rate and annual contract rate is same i.e. 10% , hence Bonds issue price = par value of bond i.e $28000 Journal Entries Date Account Title Debit Credit Jan.1,2011 Cash        28,000 Bonds payable        28,000 Answer 3 Bond issue price = Present value of bond + present value of interest payments Present value of 10 year bond at market interest rate of 12% = Par value of bond * PV Factor for 10 year @ 12% rate PV Factor = 1/(1+0.12)^10 = 0.321973 Present value of 10 year bond at market interest rate of 12% = 28000 * 0.321973 = $9015.251 Present value of semi annual interest payment of $1400 for 10 years at Market interest rate 12% p.a Total no.of semi annual interest payments for 10 years = 20 Semi annual Market Interest rate = 6% Present value of an ordinary annuity of 1 at 6% for 20 semi annual payment = PMT [(1 - (1/(1+r)^n)) / r ] PMT = amount of annuity payment = 1 r = interest rate = 0.06 n = number of periods = 20 Present value of an ordinary annuity of 1 at 6% for 20 semi annual payment = 1 [(1 - (1/(1+0.06)^20)) / 0.06 ] = 11.46992 Present value of interest payment = $1400 *11.46992 = $16057.89 Bonds issue price = 9015.251 + 16057.89= $25073 Journal Entries Date Account Title Debit Credit Jan.1,2011 Cash        25,073 Discount on bond           2,927 Bond payable        28,000