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a computing bond price and recorded issuance

Accounting
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Stewart Research issues bonds dated Jan 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. The market rate at the date of issue is 8%

Jul 3rd, 2014

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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Jul 3rd, 2014

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