Stowers Research issues bonds dated January 1, 2011, that pay interest semiannua

Question

Stowers Research issues bonds dated January 1, 2011, that pay interest semiannually on June 30 and December 31. The bonds have a $12,000 par value and an annual contract rate of 10%, and they mature in 10 years.

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.)

2) 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.)

Stowers Research issues bonds dated January 1, 2011, that pay interest semiannually on June 30 and December 31. The bonds have a $12,000 par value and an annual contract rate of 10%, and they mature in 10 years.

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

Nper = 2*10 = 20 (indicates the period over which interest payments are made)

Rate = 8%/2 = 4% (indicates the rate of interest)

FV = 12000 (indicates the par value)

PMT = 12000*5% = 600 (indicates the interest payment)

PV = ? (indicates the issue price)

Issue Price = PV(Rate,Nper,PMT,FV) = PV(4%,20,600,12000) = 13630.84 or 13631

Part B:

Journal Entry:

Cash Dr. 13631

Premium on Bonds Payable/Bonds Premium (13631-12000) Cr. 1631

Bonds Payable Cr. 12000

Thanks.

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