Financial & Managerial Accounting 3rd Edition by Charles Horngren,Harrison, Walter,Suzanne Oliver

Exercise 7

Analyzing and journalizing bond transactions
On March 1, 2012, Professors Credit Union (PCU) issued 6%, 20-year bonds payable with maturity value of $500,000. The bonds pay interest on February 28 and August 31. PCU amortizes bond premium and discount by the straight-fine method.
Requirements
1. If the market interest rate is 5% when PCU issues its bonds, will the bonds be priced at maturity (par) value, at a premium, or at a discount Explain.
2. If the market interest rate is 7% when PCU issues its bonds, will the bonds be priced at par, at a premium, or at a discount Explain.
3. The issue price of the bonds is 97. Journalize the following bond transactions:
a. Issuance of the bonds on March 1, 2012.
b. Payment of interest and amortization of discount on August 31, 2012.
c. Accrual of interest and amortization of discount on December 31, 2012.
d. Payment of interest and amortization of discount on February 28, 2013.