# Compute bond prices; prepare journal entries for stock and bond transactions

On January 1, a company issues bonds with a par value of $300,000. The bonds mature in 5 years and pay 8% annual interest each June 30 and December 31. On the issue date, the market rate of interest is 6%. Compute the price of the bonds on their issue date. The following information is taken from present value tables:

Present value of annuity for 10 periods at 3% 8.5302

Present value of annuity for 10 periods at 4% 8.1109

Present value of 1 due in 10 periods at 3% 0.7441

Present value of 1 due in 10 periods at 4% 0.6756

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A corporation had stockholders' equity on January 1 as follows: Common Stock, $5 par value, 1,000,000 shares authorized, 500,000 shares issued; Contributed Capital in Excess of Par Value, Common Stock, $1,000,000; Retained Earnings, $3,000,000. Prepare journal entries to record the following transactions:

Feb 15 The board of directors declared a 5% stock dividend to stockholders of record on March 1, to be issued on March 20. The stock was trading at $6 per share prior to the dividend.

MAR 1 The date of record

MAR 20 Issued the stock dividend

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On January 1, 2007, a company issued 10-year, 10% bonds payable with a par value of $500,000, and received $442,647 in cash proceeds. The market rate of interest at the date of issuance was 12%. The bonds pay interest semiannually on July 1 and January 1. The issuer uses the straight-line method for amortization. Prepare the issuer's journal entry to record the first semiannual interest payment on July 1, 2007.

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Texana Inc. imports inventory from Mexico. Prepare the journal entries for Texana to record the following transactions. Include any year-end adjustments.

DEC 21 Purchased inventory for Acquilla Co. for 500,000 Mexican pesos. The exchange rate was $0.0914 per peso. The credit terms were n/30.

DEC 31 The exchange rate was $0.0917 per peso.

JAN 20 Paid Acquilla Co. for the Dec 32 purchase. The exchange rate was $0.0920 per peso.

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#### Solution Preview

On January 1, a company issues bonds with a par value of $300,000. The bonds mature in 5 years and pay 8% annual (this should be semi annual) interest each June 30 and December 31. On the issue date, the market rate of interest is 6%. Compute the price of the bonds on their issue date. The following information is taken from present value tables:

Present value of annuity for 10 periods at 3% 8.5302

Present value of annuity for 10 periods at 4% 8.1109

Present value of 1 due in 10 periods at 3% 0.7441

Present value of 1 due in 10 periods at 4% 0.6756

The price of the bonds is the present value of interest and principal. The annual interest is 300,000X8% = 24,000 and the principal amount is $300,000. Interest is an annuity and so we use the PV of annuity. Principal is a lump sum and so we use PV of $1. The discounting rate is the market rate of interest which is 6%. The tables above imply semi annual interest payment as we are given for 10 periods and 3% and 4% rate. Doing on semi annual basis, semi annual interest would be 12,000, periods would be 10 and rate would be 6%/2 = 3%

Price of bonds = 12,000 X 8.5302 + ...

#### Solution Summary

The solution explains how to compute bond prices and journal entries relating to stock and bond transactions