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Chapter 12: Q21RQ (page 655)
In regard to a bond discount or premium, what is the effective-interest amortization
method?
Effective interest amotization is the method used amortize the bond by using the book value and actual interest rate.
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Determining the present value of bond at issuance
On December 31, 2018, when the market interest rate is 12%, Benson Realty issues
$600,000 of 9.25%, 10-year bonds payable. The bonds pay interest semi annually.
Determine the present value of the bonds at issuance.
What is a mortgage payable?
Schmidt Company issued $100,000, 4%, 10-year bonds payable at 98 on January 1, 2018.
6. Journalize the issuance of the bonds payable on January 1, 2018.
7. Journalize the payment of semiannual interest and amortization of the bond discount or premium (using the straight-line
amortization method) on July 1, 2018.
8. Assume the bonds payable was instead issued at 106. Journalize the issuance of the bonds payable and the payment of the
first semiannual interest and amortization of the bond discount or premium.
Reporting current and long-term liabilities
Pediatric Dispensary borrowed \(390,000 on January 2, 2018, by issuing a 15% serial
bond payable that must be paid in three equal annual installments plus interest for the
year. The first payment of principal and interest comes due January 2, 2019. Complete
the missing information. Assume the bonds are issued at face value.
December 31
2018 2019 2020
Current Liabilities:
Bonds Payable \) \( \)
Interest Payable
Long-term Liabilities:
Bonds Payable
Determining bond prices
Bond prices depend on the market rate of interest, stated rate of interest, and time.
Determine whether the following bonds payable will be issued at face value, at a
premium, or at a discount:
a. The market interest rate is 8%. Idaho issues bonds payable with a stated rate
of 7.75%.
b. Austin issued 9% bonds payable when the market interest rate was 8.25%.
c. Cleveland鈥檚 Cars issued 10% bonds when the market interest rate was 10%.
d. Atlanta鈥檚 Tourism issued bonds payable that pay the stated interest rate of 8.5%. At
issuance, the market interest rate was 10.25%.
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