Assume that on April1, 2008, Roland Corp. isssues 10%, 10-year bonds payable wit
ID: 2489411 • Letter: A
Question
Assume that on April1, 2008, Roland Corp. isssues 10%, 10-year bonds payable with a maturity value of $900,000. The bonds pay interest on March 31 and September 30, and Roland amortizes any premium and discount by the straight-line method. Roland's fiscal year-end is December 31.
Requirements: 1. If the interest rate is 9.5% when Roland issues its bonds, will the bonds be priced at maturity value, at a premium, or at a discount? Explain.
2. If the market interest rate is 10.5% when Roland issues its bonds, will the bonds be priced at maturity, at premium, or at a discount? Explain.
3. Assume that the issue price of the bonds is $936,000. Journalize the following bonds payable transactions:
a) Issuance of the bonds on April 1, 2008
b) Payment of interest and amortization of premium on September 30, 2008
c) Accrual of interest and amortization of premium on December 31, 2008
d) Payment of interest and amortization of premium on March 31, 2009
Explanation / Answer
Answer: 1
If the market rate is 9.5% , it means market interest rate is less than the stated interest of bonds. It implies that the market is paying 9.5% and Roland is paying 10% which means Roland's bonds are more vaulable and therefore, will sell at premium because Roland is giving a better deal.
Answer:2
If the market rate is 9.5% , it means market interest rate is more than the stated interest of bonds. It implies that the market is paying 9.5% and Roland is paying 10% which means Roland's bonds are less vaulable and therefore, will sell at discount in order to entice buyers.
Answer:3
a) Issuance of the bonds on April 1, 2008
Cash Dr. 936000
To bonds payable..............................900000
To premium on bonds payable............36000 [ to be amortized over 20 interest periods (10 years *2 times a year)]
b) Payment of interest and amortization of premium on September 30, 2008 (6 months - From April to September)
Interest Expense Dr. 43200
Premium on bonds payable Dr. 1800
To cash.................................................45000
Required calculations:
Premium on bonds payable : (Total premium / Maturity years of bond) * No. of months of amortization
= ($36000/10 years )* 6/12 months = 1800 premium to be amortized in six months.
Cash to be given : 900000*10%*6/12 = 45000
Interest expense = 45000 - 1800 = 43200
c) Accrual of interest and amortization of premium on December 31, 2008 (3 months - From oct. To Dec.)
Interest Expense Dr. 21600
Premium on bonds payable Dr. 900
To interest payable............................22500
Required calculations:
Premium on bonds payable : (Total premium / Maturity years of bond) * No. of months of amortization
= ($36000/10 years )* 3/12 months = 900 premium to be amortized in six months.
Interest payable : 900000*10%*3/12 = 22500
Interest expense = 22500 - 900 = 21600
d) Payment of interest and amortization of premium on March 31, 2009 (balance, 3 months - From Jan. To March)
Interest payable Dr. 22500
Interest expense Dr. 21600
Premium on bonds payable Dr. 900
To cash..........................................................45000