ACCT 201 Principles of Financial Accounting
Practice Exam - Chapter 10
Reporting & Analyzing Long-Term Liabilities
Dr. Fred Barbee

Solution to Problem #1

PDQ Properties issues bonds dated January 1, 2003, that pay interest semiannually on June 30 and December 31. The bonds have a $100,000 par value, the annual contract rate is 10% and the bonds mature in 10 years.

Required:

For each of the following three separate situations, (a) determine the bonds' issue price on January 1, 2003, and (b) prepare the journal entry to record their issuance.

Market rate at the date of issuance is 8%.
Market rate at the date of issuance is 10%.
Market rate at the date of issuance is 12%.

a. Market rate at the date of issuance is 8%
Present Value of Interest Payments
$5,000 x 13.5903

$67,952

Present Value of Face Amount at Maturity
$100,000 x 0.4564

45,640

Present Value (Issue Price) of the Bonds

$113,592

**a. Market rate at the date of issuance is 8%**
Present Value of Interest Payments	$5,000 x 13.5903	$67,952
Present Value of Face Amount at Maturity	$100,000 x 0.4564	45,640
Present Value (Issue Price) of the Bonds		$113,592

Journal Entry for part a
Cash
113,592

Premium on Bonds Payable

13,592

Bonds Payable

100,000

**Journal Entry for part a**
Cash	113,592
Premium on Bonds Payable		13,592
Bonds Payable		100,000

b. Market rate at the date of issuance is 10%
Present Value of Interest Payments
$5,000 x 12.4622

$62,311

Present Value of Face Amount at Maturity
$100,000 x 0.3769

37,690

Present Value (Issue Price) of the Bonds

$100,001

**b. Market rate at the date of issuance is 10%**
Present Value of Interest Payments	$5,000 x 12.4622	$62,311
Present Value of Face Amount at Maturity	$100,000 x 0.3769	37,690
Present Value (Issue Price) of the Bonds		$100,001

Journal Entry for part b
Cash
100,000

Bonds Payable

100,000

**Journal Entry for part b**
Cash	100,000
Bonds Payable		100,000

c. Market rate at the date of issuance is 12%
Present Value of Interest Payments
$5,000 x 11.4699

$57,350

Present Value of Face Amount at Maturity
$100,000 x 0.3118

31,180

Present Value (Issue Price) of the Bonds

$88,530

**c. Market rate at the date of issuance is 12%**
Present Value of Interest Payments	$5,000 x 11.4699	$57,350
Present Value of Face Amount at Maturity	$100,000 x 0.3118	31,180
Present Value (Issue Price) of the Bonds		$88,530

Journal Entry for part c
Cash
88,530

Discount on Bonds Payable
11,470

Bonds Payable

100,000

Cash	88,530
Discount on Bonds Payable	11,470
Bonds Payable		100,000