Assume that Durham Corporation issued $100,000, 10-year, 9%, bonds

Question 1: Bonds Issued at Par Value

Assume that Durham Corporation issued $100,000, 10-year, 9%, bonds dated February 1, 2017 at $100,000 (100% of face value). Interest on bonds is payable semi-annually on August 1 and February 1. The bonds are reported in the long-term section of the balance sheet since the maturity date is more than one year away.

Record the following entries:

a) The entry to record the issue of the bonds on February 1, 2017
b) The entry to record the first semi-annual interest payment on August 1, 2017

Assume that the bonds were issued on May 1, 2017 instead of February 1, 2017.  The purchasers of the bonds pay the purchase price plus any accrued interest on the bonds. The purchasers will receive the full 6 months’ interest on August 1, 2017.

Record the following entries:

a) The entry to record the sale of the bonds on May 1, 2017, plus accrued interest
b) The entry to record the first interest payment on August 1, 2017

Question 2: Bonds issued at a Discount

On February 1, 2017, Fireswirl Corp. issued a $900,000, 5% two-year bond.  Interest is payable semi-annually each August 1, and February 1.

a) Calculate the bond issue price assuming a market interest rate of 6% on the date of issue.
b) Using the effective interest method, prepare an amortization schedule for the term of the bond.
c) Record the entry for the issuance of the bond on February 1, the adjusting entry to accrue bond interest and related amortization on March 31, 2017, Fireswirl Corp’s year-end, and the payment of interest on August 1, 2017.

Question 3: Bonds issued at a Premium

On March 31, 2017, Fireswirl Corp. issued a $900,000, 5% two-year bond.  Interest is payable semi-annually each September 30, and March 31.

a) Calculate the bond issue price assuming a market interest rate of 4.5% on the date of issue.
b) Using the effective interest method, prepare an amortization schedule for the term of the bond.
c) Record the entry for the issuance of the bond on March 31, and the first payment of interest on September 30, 2017.

Question 4: Redemption of bonds

Michelle Corporation calls in $250,000 (par value) bonds with a carrying value of $247,950. Michelle is required to redeem the bonds at the par value. Record the entry to retire the bonds

Here’s the SOLUTION

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