On January 1, 2018, Professors Credit Union(PCU) issued 8%, 20-year bonds payabl
ID: 2342924 • Letter: O
Question
On January 1, 2018, Professors Credit Union(PCU) issued 8%, 20-year bonds payable with face value of $200,000. The bonds pay interest on June 30 and December 31.
Read the Requirements
On January 1, 2018, Professors Credit Union (PCU) issued 8%, 20-year bonds payable with face value of $200,000. The bonds pay interest on June 30 an December 31 Read the requirements Requirement 1. If the market interest rate is 6% when PCU issues its bonds, will the bonds be priced at face value, at a premium, or at a discount? Explain The 8% bonds issued when the market interest rate is 6% will be priced at a premium . They are attractive in this market, so investors will pay more than face value to acquire them Requirement 2. If the market interest rate is 9% when PCU issues its bonds, will the bonds be priced at face value, at a premium, or at a discount? Explain The 8% bonds issued when the market interest rate is 9% will be priced at a 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 94. Journalize the bond transactions. (Assume bonds payable are amortized using the straight-line amortiz 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 Date 2018 Jan. 1 Accounts and Explanation Debit Credit Choose from any list or enter any number in the input fields and then click Check Answer parts remaining Clear All Check AnswerExplanation / Answer
In the given question, the issue price of the bond is $94.00. Assuming the face value of the bond to be $100, the bonds are issued at a discount of $6.00 per share.
Discount on issue of bonds = $200,000 * (100 - 94) / 100 = $12,000
Now the discount of $12,000 should be amortized over a period of 20 years => amortization per annum = $12,000 / 20 = $600. Therefore amortized discount for 6 months => $600 / 2 = $300
Interest is payable semi-annually and therefore interest payment in cash => ($200,000 * 8%) / 2 = $8,000
Now the journal entry will
Date Accounts and Explanation Debit Credit 2018, Jan 1 Cash A/c Dr $188,000 Discount on issue of Bond A/c Dr $12,000 To 8% Bond Payable A/c $200,000 [Being $200,000 with face value of $100 issued at a discount of $6.00 for $94.00]