Question

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 $_____.

Answer 1

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