On January 1, 2018, Doctors Credit Union (DCU) issued 7%, 20-year bonds payable with face value of $200,000. The bonds pay interest on June 30 and December 31.

Requirements

1. If the market interest rate is 5% when DCU issues its bonds, will the bonds be priced at face value, at a premium, or at a discount? Explain.

2. If the market interest rate is 8% when DCU issues its bonds, will the bonds be priced at face value, at a premium, or at a discount? Explain.

3. The issue price of the bonds is 93. Journalize the following bond transactions:

a. Issuance of the bonds on January 1, 2018.

b. Payment of interest and amortization on June 30, 2018.

c. Payment of interest and amortization on December 31, 2018.

d. Retirement of the bond at maturity on December 31, 2037, assuming the last interest payment has already been recorded.

Transcribed Image Text:

Date 2018 Jan. 1 Accounts and Explanation Cash Discount on Bonds Payable Bonds Payable Issued bonds at a discount. Debit 186,000 14,000 Credit 200,000 Date 2018 Jun. 30 Accounts and Explanation Interest Expense Discount on Bonds Payable Cash Paid semiannual interest and amortized discount. Debit 7,350 Credit 350 7,000 Date 2018 Dec. 31 Accounts and Explanation Interest Expense Discount on Bonds Payable Paid semiannual interest and amortized discount. Debit 7,350 Credit 350 7000 Date 2037 Dec. 31 Accounts and Explanation Bonds Payable Cash Debit 200,000 Credit 200,000 Date 2018 Jan. 1 Accounts and Explanation Cash Discount on Bonds Payable Bonds Payable Issued bonds at a discount. Debit 186,000 14,000 Credit 200,000 Date 2018 Jun. 30 Accounts and Explanation Interest Expense Discount on Bonds Payable Cash Paid semiannual interest and amortized discount. Debit 7,350 Credit 350 7,000 Date 2018 Dec. 31 Accounts and Explanation Interest Expense Discount on Bonds Payable Paid semiannual interest and amortized discount. Debit 7,350 Credit 350 7000 Date 2037 Dec. 31 Accounts and Explanation Bonds Payable Cash Debit 200,000 Credit 200,000

Answer rating: 100% (QA)

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