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Whitefeather Industries Bond Pricing Record Issuance Calculation

On January 1, 2008, Whitefeather Industries issued 300, $1,000 face value bond. The bonds have a five-year life and pay interest at the rate of 10%. Interest is paid semiannually on July 1 and January 1. The market rate on January 1 was 10%.

Required:

1. Calculate the issue price of the bonds and record the issuance of the bonds on January 1 2008.

2. Explain how the issue price would have been affected if the market rate of interest had been higher than 10%.

3. Prepare the journal entry to record the payment of interest on July 1, 2008.

4. Calculate the amount of interest accrued on December 31, 2008.

Solution Preview

1. Calculate the issue price of the bonds and record the issuance of the bonds on January 1 2008.

Since the interest rate on bonds (10%) is equal to the market rate (10%), the bonds can be sold at the face value of $1,000. The issue price will therefore be $1,000.
Journal entry:
Dr. Cash A/c ...

Solution Summary

200 words show how to calculate and record issue price of bonds and explain how high market interest rates affect them.

$2.19