Analyzing bond terms and accounting for bonds (Learning Objective 5)

20–25 min.

Assume that on April 1, 2014, Pacific, Corp., issues 5%, 10-year bonds payable with a maturity value of $900,000. The bonds pay interest on March 31 and September 30, and Pacific amortizes any premium or discount by the straight-line method. Pacific’s fiscal year-end is December 31.

Requirements 1. If the market interest rate is 3.5% when Pacific, Corp., issues its bonds, will the bonds be priced at par, at a premium, or at a discount? Explain.

2. If the market interest rate is 6% when Pacific, Corp., issues its bonds, will the bonds be priced at par, at a premium, or at a discount? Explain.

3. Assume that the issue price of the bonds is $954,000. Journalize the following bonds payable transactions:

a. Issuance of the bonds on April 1, 2014.

b. Payment of interest and amortization of premium on September 30, 2014.

c. Accrual of interest and amortization of premium on December 31, 2014.

d. Payment of interest and amortization of premium on March 31, 2015.

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