Issuance of a Bond at Face Value

On January 1, 2017, Whitefeather Industries issued 1,100, $1,000 face value bonds. The bonds have a(n) 10-year life and pay interest at the rate of 10%. Interest is paid semiannually on July 1 and January 1. The market rate of interest on January 1 was 10%. Use the present value tables that may be found by clicking on the present value table links above. Round your answer to the nearest dollar.

Required:

1. Calculate the issue price of the bonds and record the issuance of the bonds on January 1, 2017. Round your final answer to the nearest dollar.

$fill in the blank 89f43dfeefd100d_1

Feedback

1) Face value of the bonds is the maturity amount of the bonds as indicated on the face of the bond contract. 2) Face rate of interest is the amount of interest that will be paid on the bonds as indicated in the bond contract. 3) n = periods, i = annual market rate of interest/periods per year. Bonds typically pay interest twice a year.

Identify and analyze the effect of the issuance of the bonds on January 1, 2017.

Activity	Financing
Accounts	Cash Increase, Bonds Payable Increase
Statement(s)	Balance Sheet only

Feedback

To determine the issue price of a bond, the present value of the interest (annuity) and the present value of the principal (lump sum) must be determined and added together. The issue price of a bond is always calculated using the market rate of interest. The face rate of interest (the rate specified on the bond certificate) determines the amount of interest payments, but the market rate determines the present value of the payments and the present value of the principal. So whenever the tables are used, the market rate is used. The table values need to be adjusted if the compounding is more frequent than annually. The number of interest periods will increase and the interest rate decreases. A premium or discount represents the difference between the face value and the issuance price of the bond. A discount is a deduction to the bonds payable liability and thus is a contra-liability. A premium is an addition to the bonds payable liability on the balance sheet. Identify and analyze the transaction by using the following steps: 1. Determine activity operating, investing or financing. 2. Determine accounts affected and the amount of increases/decreases. 3. Determine the financial statements affected balance sheet, income statement. The accounting equation must balance for each transaction.

How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.

Balance Sheet

Income Statement

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

Expenses

=

Income

Cash

fill in the blank 9be313f36fe5f91_2

Bonds Payable

fill in the blank 9be313f36fe5f91_4

fill in the blank 9be313f36fe5f91_5

No Entry

fill in the blank 9be313f36fe5f91_7

No Entry

fill in the blank 9be313f36fe5f91_9

fill in the blank 9be313f36fe5f91_10

Feedback

Partially correct

2. How would the issue price have been affected if the market rate of interest had been higher than 10%. Bonds would be issued at a discount.

Feedback

A premium or discount represents the difference between the face value and the issuance price of the bond. Bonds are issued at a discount when the market rate of interest exceeds the face rate. The discount on the bond equals the face value less issue price. Bonds are issued at a premium when the face rate exceeds the market rate. The premium on the bond equals the issue price less face value.

3. Identify and analyze the effect of the payment of interest on July 1, 2017.

Activity	Operating
Accounts	Cash Decrease, Interest Expense Increase
Statement(s)	Balance Sheet and Income Statement

Feedback

Identify and analyze the transaction by using the following steps: 1. Determine activity operating, investing or financing. 2. Determine accounts affected and the amount of increases/decreases. 3. Determine the financial statements affected balance sheet, income statement. The accounting equation must balance for each transaction.

How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.

Balance Sheet

Income Statement

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

Expenses

=

Income

Cash

fill in the blank ee46f1005027040_2

No Entry

fill in the blank ee46f1005027040_4

fill in the blank ee46f1005027040_5

No Entry

fill in the blank ee46f1005027040_7

Interest Expense

fill in the blank ee46f1005027040_9

fill in the blank ee46f1005027040_10

Feedback

Partially correct

4. Calculate the amount of interest accrued on December 31, 2017. If required, round your answer to the nearest dollar. $fill in the blank 5fff2a0abfb4ff2_1