Question - To raise money for a capital improvement to its national headquarters, JMO Inc. issued $2,000,000 in bonds on January 1, 2017. Assume the following :
Amount of bonds issued $2,000,000
face of bond $1,000
Maturity date 20 years
contract rate of interest 5%
interest payment is semi annual.
Calculate:
(a) how many bonds were issued?
(b) Prepare the journal entry to record the issuance of the bonds on January 1, 2017 assuming the bonds were issued at face.
(c) Prepare the journal entry to record the issuance of the bonds on January 1, 2017 assuming the bonds were issued at 98.
(d) Prepare the journal entry to record the issuance of the bonds on January 1, 2017 assuming the bonds were issued at 104
(e) Explain different approaches to amortizing bond discount and premium.
(f) Identify the amortization method preferred by FASB and explain why it's preferred
(g) Assume 5 years have passed since the bonds were originally issued and they are now trading in the secondary market. How much would a seller be willing to sell for and a buyer be willing to pay for the bonds originally issued assuming the following:
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Face amount of bonds sold:
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$100,000
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Market rate of interest on investments of similar risk:
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4%
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(f) Describe the relationship between the contract and market rate of interest with respect to how a differential between market and contract rates affects the selling price of bonds.