Question

Required information [The following information applles to the questions displayed below.] Duval Company issues four-year bonds with a $103,000 par value on January 1, 2021, at a price of $99,000. The annual contract rate is 6%, and interest is paid semiannually on June 30 and December 31. Prepare the journal entry for maturity of the bonds on December 31,2024 (assume semiannual interest is already recorded).

Answer 1

To prepare the journal entry for the maturity of the bonds on December 31, 2024, debit the bond payable account for the par value, debit the discount on bonds payable account for the difference between the par value and the issue price, and credit the cash account for the maturity value of the bonds.

Step-by-step explanation:

The question provided pertains to the journal entry for the maturity of bonds issued by the Duval Company. To prepare the journal entry for the maturity of the bonds on December 31, 2024, we need to consider the par value, the price at which the bonds were issued, and the interest paid semiannually.

Since the bonds are issued at a discount (a price lower than the par value), the discount amortization needs to be recorded. To make the journal entry, we need to debit the bond payable account for the par value of $103,000, debit the discount on bonds payable account for the difference between the par value and the issue price ($103,000 - $99,000 = $4,000), and credit the cash account for the maturity value of the bonds ($103,000).

Answer 2

Bond maturity involves repaying the par value, and such an entry debits bonds payable and credits cash. Present value calculations adjust the worth of future payments based on a discount rate, where a higher rate decreases the present value. A bond with a lower interest rate than the market rate sells for less than its par value.

Step-by-step explanation:

The student's question relates to the maturity of a bond and its associated journal entry. When a bond matures, the issuer must pay back the principal amount (par value) to the bondholders. Assuming that all the interest payments have been recorded previously, the journal entry to record bond maturity would involve a debit to the bonds payable account and a credit to the cash account for the par value of the bonds. The debit decreases the liabilities (showing the bond is being paid off), and the credit decreases assets (cash is being used to pay the bond).

Let's apply this to a simplified example that also illustrates the concept of present value with different discount rates. If a two-year bond is issued for $3,000 at an interest rate of 8%, it will pay $240 in interest each year. Using the present value formula, this bond's present value at an 8% discount rate equals the sum of the present values of each payment (interest and principal).

To calculate present value, we would consider both the interest payments and the repayment of the principal separately:

1. Present Value of Year 1 interest = $240 / (1 + 0.08)1 = $222.22
2. Present Value of Year 2 interest + principal = ($240 + $3,000) / (1 + 0.08)2 = $2,777.78
3. Total Present Value at 8% = $222.22 + $2,777.78 = $3,000

If the discount rate rises to 11%, the present value would decrease:

1. Present Value of Year 1 interest = $240 / (1 + 0.11)1 = $216.22
2. Present Value of Year 2 interest + principal = ($240 + $3,000) / (1 + 0.11)2 = $2,648.65
3. Total Present Value at 11% = $216.22 + $2,648.65 = $2,864.87

Focusing on question 37, regarding the bond with one year left before maturity at a higher interest rate of 9%, the buyer would expect to pay less than the $10,000 par value because the bond's fixed interest payments are less attractive when new bonds are offering a higher interest rate. The present value of the bond's remaining payments (interest + principal) would be calculated with the new 9% discount rate to determine its current fair value.