Stowers Research issues bonds dated January 1, 2011, that pay interest semiannua
ID: 2359111 • Letter: S
Question
Stowers Research issues bonds dated January 1, 2011, that pay interest semiannually on June 30 and December 31. The bonds have a $20,000 par value and an annual contract rate of 10%, and they mature in 10 years.1. The market rate at the date of issuance is 8%. (a) Determine the bonds' issue price on January 1, 2011.(b) Prepare the journal entry to record their issuance.2. The market rate at the date of issuance is 10%. (a) Determine the bonds' issue price on January 1, 2011.(b) Prepare the journal entry to record their issuance.Explanation / Answer
1. Get the PV of 37,000, at Market rate of 5% (semi annual) for 20 periods. Then get the PV of an Annuity of 2,220 (Face x 6% - contract rate, semi annual), also at 5%, N 20 (a) PV of Face Value - 13,945 + PV Annuity - 27,666 = 41,611 Issue Price of Bond (b) DR Cash 41,611 CR Bonds Payable 37,000 CR Bond Premium 4,611 2. Exactly the same method, but using 6% for Market rate. (Sold at Par) 3. Exactly the same method, but using 7% for Market rate. (Sold at a Discount)