question archive On February 28, 2014, Durmann Corp
On February 28, 2014, Durmann Corp
Subject:AccountingPrice:2.89 Bought3
On February 28, 2014, Durmann Corp. issues 5%, 10-year bonds payable with a face value of $900,000. The bonds pay interest on February 28 and August 31. Durmann Corp. amortizes bond discount by the straight-line method.
Requirements
1. If the market interest rate is 4% when Durmann 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 6% when Durmann 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 95. Journalize the following bonds payable transactions.
a. Issuance of the bonds on February 28, 2014
b. Payment of interest and amortization of the bond discount on August 31, 2014
c. Accrual of interest and amortization of the bond discount on December 31, 2014, the year-end
d. Payment of interest and amortization of the bond discount on February 28, 2015
4. Report interest payable and bonds payable as they would appear on the Durmann Corp. balance sheet
at December 31, 2014.
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Req. 1
The 5% bonds issued when the market interest rate is4% will be priced at a premium. They are relatively attractive in this market, so investors will pay a price above par value to acquire them.
Req. 2
The 5% bonds issued when the market interest rate is 6%will be priced at a discount. They are relatively unattractive in this market, so investors will pay less than par value to acquire them.
Req. 3
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Journal |
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DATE |
ACCOUNT TITLES AND EXPLANATION |
DEBIT |
CREDIT |
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2014 |
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a. |
Feb. |
28 |
Cash ($900,000 × .95).................................................... |
855,000 |
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Discount on Bonds Payable........................................... |
45,000 |
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Bonds Payable........................................................... |
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900,000 |
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To issue bonds at a discount. |
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b. |
Aug. |
31 |
Interest Expense............................................................. |
24,750 |
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Cash ($900,000 × .05 × 6/12).................................... |
|
22,500 |
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Discount on Bonds Payable |
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($45,000 / 20)......................................................... |
|
2,250 |
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To pay interest and amortize bond discount. |
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c. |
Dec. |
31 |
Interest Expense............................................................. |
16,500 |
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Interest Payable ($22,500 × 4/6)............................... |
|
15,000 |
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Discount on Bonds Payable |
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($2,250 × 4/6)......................................................... |
|
1,500 |
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To accrue interest and amortize bond discount. |
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2015 |
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d. |
Feb. |
28 |
Interest Payable (from Dec. 31)..................................... |
15,000 |
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Interest Expense............................................................. |
8,250 |
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Cash ($900,000 × .05 × 6/12).................................... |
|
22,500 |
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|
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Discount on Bonds Payable |
|
|
|
|
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($2,250 × 2/6)......................................................... |
|
750 |
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To pay interest and amortize bond discount. |
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Req. 4 (reporting the liabilities on the balance sheet atDec.31, 2014)
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Current liabilities: |
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Interest payable................................................................... |
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$ 15,000 |
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Long-term liabilities: |
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Bonds payable.................................................................... |
$900,000 |
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Less: Discount on bonds payable |
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($45,000 − $2,250 − $1,500)............................. |
(41,250) |
858,750 |
