Chapter 12, Problem 12.40BP

Analyzing and journalizing bond transactions

On January 1, 2016, Texas Credit Union (TCU) issued 6%, 20-year bonds payable with Face value of $600,000. The bonds pay interest on June 30 and December 31.

Requirements

1. If the market interest rate is 5% when TCU 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 9% when TCU 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 96. Journalize the following bond transactions:

a. Issuance of the bonds on January 1, 2016.

b. Payment of interest and amortization on June 30, 2016.

c. Payment of interest and amortization on December 31, 2016.

d. Retirement of the bond at maturity on December 31, 2035.