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Round dollar amounts to the nearest whole dollar. Assume no reversing entries are used.
Problem 10-1A
Computing bond price and recording issuance
P1 P2 P3
Check (1) Premium, $4,760
(3) Discount, $4,223 Harvard Research issues bonds dated January 1, 2009, that pay interest semiannually on June 30 and December 31. The bonds have a $45,000 par value, an annual contract rate of 6%, and mature in 6 years.
Required
For each of the following three separate situations, (a) determine the bonds' issue price on January 1, 2009, and (b) prepare the journal entry to record their issuance.
1. Market rate at the date of issuance is 4%.
2. Market rate at the date of issuance is 6%.
3. Market rate at the date of issuance is 8%.

Part 1

a.

Cash Flow / Table / TableValue* / Amount / Present Value
Par value......
/ B.1 / 0.7885 / $45,000 / $35,483
Interest (annuity)...... / B.3 / 10.5753 / 1,350* / 14,277
Price of bonds...... / $49,760
Bond premium...... / $ 4,760
*$45,000 x 0.06 x ½ = $1,350

*Table values are based on a discount rate of 2% (half the annual market rate) and 12 periods (semiannual payments).

b.

2009

Jan. 1 / Cash...... / 49,760
Premium on Bonds Payable...... / 4,760
Bonds Payable...... / 45,000
Sold bonds on stated issue date.

Part 2

a.

Cash Flow / Table / TableValue* / Amount / Present Value
Par value......
/ B.1 / 0.7014 / $45,000 / $31,563
Interest (annuity)...... / B.3 / 9.9540 / 1,350 / 13,438
Price of bonds...... / $45,001*

*Table values are based on a discount rate of 3% (half the annual market rate) and 12 periods (semiannual payments). (Note: When the contract rate and market rate are the same, the bonds sell at par and there is no discount or premium. The $1 difference is due to rounding.)

b.

2009

Jan. 1 / Cash...... / 45,000
Bonds Payable...... / 45,000
Sold bonds on stated issue date.

Part 3

a.

Cash Flow / Table / TableValue* / Amount / Present Value
Par value......
/ B.1 / 0.6246 / $45,000 / $28,107
Interest (annuity)...... / B.3 / 9.3851 / 1,350 / 12,670
Price of bonds...... / $40,777
Bond discount...... / $ 4,223

*Table values are based on a discount rate of 4% (half the annual market rate) and 12 periods (semiannual payments).

b.

2009

Jan. 1 / Cash...... / 40,777
Discount on Bonds Payable...... / 4,223
Bonds Payable...... / 45,000
Sold bonds on stated issue date.

Problem 10-3A
Straight-line amortization of bond premium
P1 P3
Check (2) 6/30/2009 carrying value, $234,644 Jules issues 4.5%, five-year bonds dated January 1, 2009, with a $230,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $235,160. The annual market rate is 4% on the issue date.
Required
1. Calculate the total bond interest expense over the bonds' life.
2. Prepare a straight-line amortization table like Exhibit 10.11 for the bonds' life.
3. Prepare the journal entries to record the first two interest payments.

Part 1

Ten payments of $5,175* ...... / $ 51,750
Par value at maturity...... / 230,000
Total repaid...... / 281,750
Less amount borrowed...... / (235,160)
Total bond interest expense...... / $ 46,590
*$230,000 x 0.045 x ½ = $5,175

or:

Ten payments of $5,175...... / $ 51,750
Less premium...... / (5,160)
Total bond interest expense...... / $ 46,590

Part 2

Straight-line amortization table ($5,160/10 = $516)

Semiannual
Interest Period-End / Unamortized
Premium / Carrying
Value
1/01/2009...... / $5,160 / $235,160
6/30/2009...... / 4,644 / 234,644
12/31/2009...... / 4,128 / 234,128
6/30/2010...... / 3,612 / 233,612
12/31/2010...... / 3,096 / 233,096
6/30/2011...... / 2,580 / 232,580
12/31/2011...... / 2,064 / 232,064
6/30/2012...... / 1,548 / 231,548
12/31/2012...... / 1,032 / 231,032
6/30/2013...... / 516 / 230,516
12/31/2013...... / 0 / 230,000

Part 3

2009

June 30 / Bond Interest Expense...... / 4,659
Premium on Bonds Payable...... / 516
Cash...... / 5,175
To record six months’ interest and
premium amortization.
2009
Dec. 31 / Bond Interest Expense...... / 4,659
Premium on Bonds Payable...... / 516
Cash...... / 5,175
To record six months’ interest and
premium amortization.