101
219) The stated interest rate is less than the market interest rate.
Difficulty: 2 Medium
Topic: Recording Bonds Payable – Face Amount; Recording Bonds Payable – Discount;
Recording Bonds Payable – Premium; Pricing a Bond – Face Amount; Pricing a Bond – Discount;
Pricing a Bond – Premium
Learning Objective: 09-05 Record the issuance of bonds and related interest.; 09-07 Calculate
the issue price of a bond
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
220) The rate quoted in the bond contract used to calculate the cash payments for interest.
Difficulty: 2 Medium
Topic: Recording Bonds Payable – Face Amount; Recording Bonds Payable – Discount;
Recording Bonds Payable – Premium; Pricing a Bond – Face Amount; Pricing a Bond – Discount;
Pricing a Bond – Premium
Learning Objective: 09-05 Record the issuance of bonds and related interest.; 09-07 Calculate
the issue price of a bond
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
102
221) On January 1, 2021, Julee Enterprises borrows $30,000 to purchase a new Toyota
Highlander by agreeing to a 6%, 4-year note with the bank. Payments of $704.55 are due at the
end of each month with the first installment due on January 31, 2021. Record the issuance of the
note payable and the first two monthly payments.
222) On January 1, 2021, California Financial purchases a building for $900,000, signing a 5%,
20-year mortgage. Installment payments of $5,939.60 are due at the end of each month, with the
first payment due on January 31, 2021.
Required:
1. Record issuance of the mortgage installment note on January 1, 2021.
2. Record the first monthly mortgage payment on January 31, 2021.
3. Record the second monthly mortgage payment on February 28, 2021.
4. Total payments over the 20 years are $1,425,504 ($5,939.60 × 240 monthly payments). How
much of this is interest expense and how much is actual payment of the loan?
104
223) On January 1, 2021, Florida Investments purchases a condo for $400,000. The company
pays cash of $80,000 and issues a 6%, 30-year note payable for the remaining $320,000.
Installment payments of $1,918.56 are due at the end of each month, with the first payment due
on January 31, 2021.
Required:
1. Record issuance of the mortgage installment note on January 1, 2021.
2. Fill in the blanks for the first three rows of the amortization schedule blow:
3. Record the first monthly mortgage payment on January 31, 2021. How much of the first
payment goes to interest expense and how much goes to reducing the carrying value of the loan?
4. Total payments over the 30 years are $690,682 ($1,918.56 × 360 monthly payments). How
much of this is interest expense and how much is actual payment of the loan?
106
224) Valentino’s Pizza issues $40 million of 3% convertible bonds that mature in ten years. Each
$1,000 bond is convertible into twenty-five shares of common stock. The current market price of
Valentino’s stock is $35 per share.
1. Explain why Valentino’s might choose to issue convertible bonds.
2. Explain why investors might choose to purchase Valentino’s convertible bonds.
225) A company issues 7%, 10-year bonds with a face amount of $80,000 on January 1, 2021.
The market interest rate for bonds of similar risk and maturity is also 7%. Interest is paid
semiannually on June 30 and December 31.
1. Record the bond issue.
2. Record the first interest payment on June 30, 2021.
107
226) A company issues 7%, 10-year bonds with a face amount of $80,000 for $74,564 on
January 1, 2021. The market interest rate for bonds of similar risk and maturity is 8%. Interest is
paid semiannually on June 30 and December 31.
1. Record the bond issue.
2. Record the first interest payment on June 30, 2021.
108
227) A company issues 7%, 10-year bonds with a face amount of $80,000 for $85,951 on
January 1, 2021. The market interest rate for bonds of similar risk and maturity is 6%. Interest is
paid semiannually on June 30 and December 31.
1. Record the bond issue.
2. Record the first interest payment on June 30, 2021.
Answer:
109
228) Presented below is a partial amortization schedule for Discount Foods:
(1) Period
(2) Cash Paid
(4) Increase
in Carrying
Value
(5) Carrying
Value
Issue date
$74,564
1
$2,800
$183
74,747
2
2,800
190
74,937
1. Record the bond issue assuming the face value of bonds payable is $80,000.
2. Record the first interest payment.
Answer:
1.
Cash
74,564
Discount on Bonds Payable
5,436
Bonds Payable
80,000
(to record the bond issue)
2.
Interest Expense
2,983
Discount on Bonds Payable
183
Cash
2,800
(First interest payment)
110
229) Presented below is a partial amortization schedule for Premium Foods:
(1) Period
(2) Cash Paid
(4) Decrease
in Carrying
Value
(5) Carrying
Value
Issue date
$85,951
1
$2,800
$221
85,730
2
2,800
228
85,502
1. Record the bond issue assuming the face value of bonds payable is $80,000.
2. Record the first interest payment.
Answer:
1.
Cash
85,951
Bonds Payable
80,000
Premium on Bonds Payable
5,951
(to record the bond issue)
2.
Interest Expense
2,579
Premium on Bonds Payable
221
Cash
2,800
(First interest payment)
230) On January 1, 2021, a company issues $800,000 of 8% bonds, due in ten years, with interest
payable semiannually on June 30 and December 31 each year. Assuming the market interest rate
on the issue date is 8%, the bonds will issue at $800,000. Record the bond issue on January 1,
2021, and the first two semiannual interest payments on June 30, 2021, and December 31, 2021.
112
231) On January 1, 2021, a company issues $800,000 of 8% bonds, due in ten years, with interest
payable semiannually on June 30 and December 31 each year. Assuming the market interest rate
on the issue date is 9%, the bonds will issue at $747,968.
1. Fill in the blanks in the amortization schedule below:
2. Record the bond issue on January 1, 2021, and the first two semi-annual interest payments on
June 30, 2021, and December 31, 2021.
113
Answer:
114
232) On January 1, 2021, a company issues $800,000 of 8% bonds, due in ten years, with interest
payable semiannually on June 30 and December 31 each year. Assuming the market interest rate
on the issue date is 7%, the bonds will issue at $856,850.
1. Fill in the blanks in the amortization schedule below:
2. Record the bond issue on January 1, 2021, and the first two semi-annual interest payments on
June 30, 2021, and December 31, 2021.
115
Answer:
116
233) Sun City issues $50 million of bonds on January 1, 2021 that pay interest semiannually on
June 30 and December 31. A portion of the bond amortization schedule appears below:
(1) Date
(2) Cash Paid
(4) Decrease
in Carrying
Value
(5) Carrying
Value
1/1/2021
$55,338,768
6/30/2021
2,000,000
63,143
55,275,625
12/31/2021
2,000,000
65,353
55,210,272
Required:
1. Were the bonds issued at face amount, a discount, or a premium?
2. What is the original issue price of the bonds?
3. What is the face amount of the bonds?
4. What is the stated annual interest rate? (Hint: Be sure to provide the annual rate rather than the
six-month rate.)
5. What is the market annual interest rate? (Hint: Be sure to provide the annual rate rather than
the six-month rate.)
6. What is the total cash paid for interest assuming the bonds mature in 20 years?
117
234) Pizza Pier retires its 7% bonds for $68,000 before their scheduled maturity. At the time, the
bonds have a face value of $70,000 carrying value of $74,937. Record the early retirement of the
bonds.
235) Magic Mountain retires its 8% bonds for $127,000 before their scheduled maturity. At the
time, the bonds have a face value of 125,000 and a carrying value of $118,000. Record the early
retirement of the bonds.
118
236) Stealth Fitness Center issues 7%, 10-year bonds with a face amount of $200,000. The
market interest rate for bonds of similar risk and maturity is 8%. Interest is paid semiannually. At
what price will the bonds be issued?
119
237) Stealth Fitness Center issues 7%, 15-year bonds with a face amount of $200,000. The
market interest rate for bonds of similar risk and maturity is 6%. Interest is paid semiannually. At
what price will the bonds be issued?
120
238) On January 1, 2021, Water Wonderland issues $20 million of 8% bonds, due in ten years,
with interest payable semiannually on June 30 and December 31 each year.
1. If the market rate is 7%, will the bonds issue at face amount, a discount, or a premium?
Calculate the issue price.
2. If the market rate is 8%, will the bonds issue at face amount, a discount, or a premium?
Calculate the issue price.
3. If the market rate is 9%, will the bonds issue at face amount, a discount, or a premium?
Calculate the issue price.