Question

# On January 1, Yankee Company issued \$100,000 par​ value, 4%​, 5​-year bonds​ (i.e., there were 100...

On January 1, Yankee Company issued \$100,000 par​ value, 4%​, 5​-year bonds​ (i.e., there were 100 of \$1,000 par value bonds in the​ issue). Interest is payable semiannually each January 1 and July 1 with the first interest payment due at the end of the period on July 1. Yankee paid \$10,000 in underwriting fees. Determine the issue price of the bonds with a 12% market rate of interest and prepare the journal entry to record the bond issue. The issue bond price is \$_____.

SOLUTION

Present value computation for I / Y = 6% (12% / 2) and N = 10 (5 years x 2)

 N I / Y PV PMT FV Excel Formula Given 10 6.00% -2,000 (\$100,000*2%) -100,000 Solve For PV 70559.18 =PV(0.06,10,-2000,-100000)

or

pv = (pmt * pvaf(i,n)) + (fv * pvf(i,n)) (pvaf = present value ordinary annuity factor

pv = (\$2,000 * pvaf (6%,10)) +( \$100,000*pvf(6%,10)   pvf = present value factor refer tables)

pv = (\$2000 * 7.36009)+(\$100,000*0.55839)

pv= \$14,720.18 + \$ 55,839

pv = \$ 70559.18

 CASH FLOWS AMOUNT Selling Price \$70559.18 Par Value (100,000) Discount on Bonds Payable \$29,440.82

 Account Bond Issue Date Cash (\$70559.18 – \$10,000) 60559.18 Unamortized Bond Issue Costs 10,000 Discount on Bonds Payable 29,440.82 Bonds Payable—Par 100,000

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