Terms and Definitions The interest rate paid on the face amount of a bond is called the contract rate of interest. The interest rate paid on similar risk bonds is called the market rate of interest. When the contract rate of interest is less than the market rate of Interest, the bonds will sell for less than their face value. The difference between the selling price and the face amount of the bonds in this case is called a discount . Feedback Check My Work When a bond is issued at a discount, the proceeds at issuance will be less than the face value of the bond. When a bond is issued at a premium, the proceeds at issuance will be more than the face value of the bond. Understanding the Business Transaction On January 1, 2014 Jack Company issued the following bonds that have a ten-year maturity and pay interest semi-annually. Face Value Contract Rate Market rate The bonds will sell at: $3,780,000 7% 10% a discount If the market rate of interest is greater than the contract rate of interest, the bonds will sell for less than their face value because the bond will pay less another company. interest than a buyer could earn on similar risk bonds issued by Feedback Check My Work The cash interest paid on a bond is calculated by multiplying the face value times the contract rate of Interest and dividing the result by 2. Recording in the Accounting System On January 1, 2014, Jack Company issues the $3,780,000,7%, 10-year bonds described above for cash of $3,073,395. Journalize the issuance of the Jack Company bonds. If an amount box does not require an entry, leave it blank. Cash Discount on Bonds Payable Bonds Payable Dlacount on Bonds Payable v 5 8 Feedback Check My Work When a bond is issued at a discount, the proceeds at issuance will be less than the face value of the bond. When bonds sell at a discount, their carrying value will be less than their face value. When bonds sell at a discount, their carrying value will be less than their face value. Feedback Check My Work When a bond is issued at a discount, the proceeds from the issuance will be less than the face value of the bond. Financial Statement Impact On July 1, 2014 Botwin Company issues $1,000,000, 10%, bonds payable due in 10 years. Click here and use the slider to select the relevant interest rate to answer the following questions. 1.a. If the market rate of interest is 12%, what is the issue price of the bonds payable? $0.321 b. If the market rate of interest is 12%, what is the discount on the bonds payable? c. If the market rate of interest is 12%, what is the carrying amount of the bonds payable on the date of issuance? their face value. d. If the market rate of interest is higher than the contract rate of interest, the bonds will sell for less than 2.a. If the market rate of interest is 14%, what is the selling price of the bonds payable? b. If the market rate of interest is 14%, what is the discount on the bonds payable? c. If the market rate of interest is 14%, what is the carrying amount of the bonds payable on the date of issuance? d. If the contract rate of interest remains constant, the amount of the discount when the bond is issued will increase as the market rate of interest increases
