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Goodbody Vaults Corporations produces and sells burial vaults. On July 1, 2008, Goodbody Vaults Corporation issued $12,000,000 of 10-year, 8% bonds at par. Interest on the bonds is payable semi-annually on December 31, and June 30. The fiscal year of the company is the calendar year. Instructions: 1. Illustrate the effects of the issuance of the bonds on July I, 2008, on the accounts and financial statements. 2. Illustrate the effects of the first semiannual interest payment on December 31, 2008, on the accounts and financial statements. 3. Illustrate the effects of the payments of the face value of bonds at maturity on the accounts and financial statements. 4. If the market rate of interest were 7% on July 1, 2008, would the bonds have sold at a discount or premium?

Public Comments

1. 1. Illustrate the effects of the issuance of the bonds on July I, 2008, on the accounts and financial statements. Dr Cash $12,000,000 Cr Bonds payable $12,000,000 Cash and long-term liabilities increased $12,000,000. No effect on income statement. 2. Illustrate the effects of the first semiannual interest payment on December 31, 2008, on the accounts and financial statements. Dr Interest expense $480,000 Cr Cash $480,000 Expenses increased (profit decreased) and cash decreased $480,000. 3. Illustrate the effects of the payments of the face value of bonds at maturity on the accounts and financial statements. Dr Bonds payable $12,000,000 Cr Cash $12,000,000 Liabilities and cash both decreased $12,000,000. 4. If the market rate of interest were 7% on July 1, 2008, would the bonds have sold at a discount or premium? Since the bonds pay 8%, you are getting a better deal by buying the bonds, so they would be sold at a premium.