On January​ 1, 2024​, Neighborhood Credit Union ​(NCU​) issued 6 %​, 20​-year bonds payable with face value of $ 900000. The bonds pay interest on June 30 and December 31.

Question

If the market interest rate is 5 % when NCU issues its​ bonds, will the bonds be priced at face​ value, at a​ premium, or at a​ discount? Explain.
The 6% bonds issued when the market interest rate is 5% will be priced at [blank]. They are [blank] in this market, so investors will pay [blank] to acquire them.

Answer 1

When a bond's coupon rate (the interest rate it pays) is higher than the market interest rate, the bond will typically be priced at a premium. In this case, Neighborhood Credit Union (NCU) issued bonds with a coupon rate of 6%, while the market interest rate is 5%.

This means that:

• The 6% bonds issued when the market interest rate is 5% will be priced at a premium.
• They are more attractive in this market, so investors will pay more than the face value to acquire them.

To summarize:

The 6% bonds issued when the market interest rate is 5% will be priced at a premium. They are more attractive in this market, so investors will pay more than the face value to acquire them.

Answer 2

If the market interest rate is 7 % when NCU issues its​ bonds, will the bonds be priced at face​ value, at a​ premium, or at a​ discount? Explain.
The 6% bonds issued when the market interest rate is 7% will be priced at [blank]. They are [blank] in this market, so investors will pay [blank] to acquire them.

Answer 3

When a bond's coupon rate is lower than the market interest rate, the bond will typically be priced at a discount. In this case, Neighborhood Credit Union (NCU) issued bonds with a coupon rate of 6%, while the market interest rate is 7%.

This means that:

• The 6% bonds issued when the market interest rate is 7% will be priced at a discount.
• They are less attractive in this market, so investors will pay less than the face value to acquire them.

To summarize:

The 6% bonds issued when the market interest rate is 7% will be priced at a discount. They are less attractive in this market, so investors will pay less than the face value to acquire them.

Answer 4

The issue price of the bonds is 97. Journalize the bond transactions.
A: Journalize the issuance of the bonds on January 1, 2024

Answer 5

To journalize the issuance of bonds at a discount, you need to record the cash received, the bonds payable, and the discount on bonds payable.

Given that the issue price of the bonds is 97% of the face value, here’s how you would calculate and journalize the issuance:

1. Face Value of the Bonds: $900,000
2. Issue Price (at 97%): $900,000 × 0.97 = $873,000
3. Discount on Bonds Payable: $900,000 - $873,000 = $27,000

Now, here’s the journal entry for the issuance of the bonds on January 1, 2024:

Journal Entry:

| Date | Account Title | Debit | Credit | |---------------|-------------------------------|------------|------------| | January 1, 2024 | Cash | $873,000 | | | | Discount on Bonds Payable | $27,000 | | | | Bonds Payable | | $900,000 |

Explanation:

• Cash is debited for the amount received from the sale of the bonds ($873,000).
• Discount on Bonds Payable is debited for the amount of the discount ($27,000).
• Bonds Payable is credited for the face value of the bonds issued ($900,000).

This entry reflects the issuance of the bonds at a discount, recognizing that the company is receiving less cash than the total face value amount due to the market's higher interest rates.

Answer 6

B. Journalize the payment of interest and amortization on June 30, 2024

Answer 7

To journalize the payment of interest and the amortization of the discount on bonds payable, you need to follow these steps:

1. Calculate the Cash Interest Payment:

   • The bonds have a face value of $900,000 and an annual interest rate of 6%.
   • The interest payment is paid semiannually, so each payment is: \[ \text{Interest Payment} = \text{Face Value} \times \text{Coupon Rate} \times \frac{1}{2} = 900,000 \times 0.06 \times \frac{1}{2} = 27,000 \]

2. Calculate the Amortization of the Discount:

   • The total discount on the bonds is $27,000, and it will be amortized over the life of the bonds, which is 20 years (40 periods).
   • Amortization per period is: \[ \text{Amortization per period} = \frac{\text{Total Discount}}{\text{Total Periods}} = \frac{27,000}{40} = 675 \]

3. Prepare the Journal Entry:

   • Debit the Interest Expense account for the total interest expense, which includes the cash interest payment plus the amortization of the discount.
   • Credit the Cash account for the cash interest payment.
   • Credit the Discount on Bonds Payable for the amortization amount.

Here's the Journal Entry:

Journal Entry:

| Date | Account Title | Debit | Credit | |---------------|-----------------------------------|------------|------------| | June 30, 2024 | Interest Expense | $27,675 | | | | Cash | | $27,000 | | | Discount on Bonds Payable | | $675 |

Explanation:

• Interest Expense is debited for the total amount of interest expense recognized, which is the cash payment plus the amortization of the discount: \(27,000 + 675 = 27,675\).
• Cash is credited for the cash interest payment of $27,000.
• Discount on Bonds Payable is credited for the amortization amount of $675, decreasing the total discount.

This entry properly reflects the cost of borrowing under the discount on bonds payable and the payment made to bondholders.

Answer 8

Journalize the payment of interest and amortization on December 31, 2024

Answer 9

To journalize the payment of interest and the amortization of the discount on bonds payable for December 31, 2024, you would follow the same steps as you did for the previous interest payment on June 30, 2024.

1. Calculate the Cash Interest Payment:

   • The cash interest payment remains the same as before, as the bonds are paying interest at a fixed coupon rate of 6%. \[ \text{Interest Payment} = \text{Face Value} \times \text{Coupon Rate} \times \frac{1}{2} = 900,000 \times 0.06 \times \frac{1}{2} = 27,000 \]

2. Calculate the Amortization of the Discount:

   • The total discount on the bonds is $27,000, and we previously calculated that the amortization per period is $675.
   • Since this is the second interest payment, the amortization amount remains the same at: \[ \text{Amortization per period} = 675 \]

3. Prepare the Journal Entry:

   • Again, we debit the Interest Expense account for the total interest expense (cash interest payment plus the amortization).
   • Credit the Cash account for the cash interest payment.
   • Credit the Discount on Bonds Payable for the amortization amount.

Here’s the Journal Entry for December 31, 2024:

Journal Entry:

| Date | Account Title | Debit | Credit | |---------------|-----------------------------------|------------|------------| | December 31, 2024 | Interest Expense | $27,675 | | | | Cash | | $27,000 | | | Discount on Bonds Payable | | $675 |

Explanation:

• Interest Expense is debited for the total amount of interest expense recognized, which consists of the cash payment ($27,000) plus the amortization of the discount ($675), totaling $27,675.
• Cash is credited for the cash interest payment of $27,000.
• Discount on Bonds Payable is credited for the amortization amount of $675, reducing the balance of the discount.

This entry correctly reflects the interest expense incurred and the payment to bondholders for the period ending December 31, 2024.

Answer 10

D. Journalize the retirement of the bond at maturity on December 31, 2043 assuming the last interest payment has already been recorded.

Answer 11

When a bond matures, the issuer must pay back the face value of the bond to the bondholders. In the case of Neighborhood Credit Union (NCU), the face value of the bonds is $900,000. Since you've specified that the last interest payment has already been recorded, we can proceed directly to recording the retirement of the bonds payable when they mature on December 31, 2043.

Here's how to journalize the retirement of the bond:

Journal Entry on December 31, 2043:

| Date | Account Title | Debit | Credit | |---------------|---------------------------|------------|------------| | December 31, 2043 | Bonds Payable | $900,000 | | | | Cash | | $900,000 |

Explanation:

• Bonds Payable: This account is debited for the full face value of the bonds, which removes the liability from the books. The amount debited is $900,000.
• Cash: This account is credited for the full face value of the bonds as well, reflecting the cash paid to bondholders upon maturity. The amount credited is $900,000.

This journal entry reflects the retirement of the bonds at maturity, indicating that the issuer has fulfilled its obligation to pay back the face value of the bonds to bondholders.