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

20–25 min.

Assume that on March 1, 2014, Simmons, Corp., issued 8%, 10-year bonds payable with maturity value of $900,000. The bonds pay interest on February 28 and August 31, and Simmons amortizes any premium or discount by the straight-line method.

Simmons’ fiscal year-end is September 30.

Requirements 1. If the market interest rate is 7.25% when Simmons, 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 9.5% when Simmons, 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 $924,000. Journalize the following bonds payable transactions:

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

b. Payment of interest and amortization of premium on August 31, 2014.

c. Accrual of interest and amortization of premium on September 30, 2014.

d. Payment of interest and amortization of premium on February 28, 2015.

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