Question: How does the market interest rate impact the bond issuance for P9-5B Viking Voyager? And how is it recorded in the company's financial statements?
Bond Issuance and Interest Payments
When P9-5B Viking Voyager issues bonds on January 1, 2024, the market interest rate plays a crucial role in determining the bond issue price. Let's analyze the scenarios based on different market interest rates:
1. Market Interest Rate 9%
When the market interest rate is equal to the coupon rate of 9%, the bond issue price matches the face value of $3,000,000. As a result, the company records the following transactions:
January 1, 2024:
Cash - $3,000,000
Bonds Payable - $3,000,000
June 30, 2024:
Interest Expense - $135,000
Cash - $135,000
December 31, 2024:
Interest Expense - $135,000
Cash - $135,000
2. Market Interest Rate 10%
When the market interest rate is higher at 10%, the bond issue price decreases to $52,813,067, resulting in a discount. The recording of transactions is as follows:
January 1, 2024:
Cash - $52,813,067
Bonds Payable - $52,813,067
June 30, 2024:
Interest Expense - $2,376,589
Cash - $2,376,589
December 31, 2024:
Interest Expense - $2,376,589
Cash - $2,376,589
3. Market Interest Rate 8%
On the other hand, when the market interest rate is lower at 8%, the bond issue price increases to $3,203,855, leading to a premium. The following entries are made in the financial records:
January 1, 2024:
Cash - $3,203,855
Bonds Payable - $3,203,855
June 30, 2024:
Interest Expense - $128,154
Cash - $128,154
December 31, 2024:
Interest Expense - $128,154
Cash - $128,154
The market interest rate's impact on bond issuance is clear - higher rates result in discounts, while lower rates lead to premiums. Nonetheless, the interest payments remain consistent, calculated based on the face value and coupon rate.