Question

Bringham Company issues bonds with a par value of $560,000 on their stated issue date. The bonds mature in 8 years and pay 7% annual interest in semiannual payments. On the issue date, the annual market rate for the bonds is 10%. (Table B.1, Table B.2, Table B.3, and Table B.4) (Use appropriate factor(s) from the tables provided.)

1. What is the amount of each semiannual interest payment for these bonds?
2. How many semiannual interest payments will be made on these bonds over their life?
3. Use the interest rates given to select whether the bonds are issued at par, at a discount, or at a premium.
4. Compute the price of the bonds as of their issue date.
5. Prepare the journal entry to record the bonds’ issuance.

Answer 1

Answer

1.

Semi-Annual Interest Payments = Face Value * Interest Rate * 6/12 months

= $560,000 * 7% * 6/12 months

Semi-Annual Interest Payments = $19,600

2.

Semi-Annual Interest Payments = Bonds life (In Years) * 2 Semi period per year

= 8 Years * 2 Semi-Period per year

Semi-Annual Interest Payments = 16

3.

Company is paying 7% Interest Rate but Market rate is 10%, so Company is paying less interest, So they must have issued Bonds at Discount.

4.

5.

Bank	468,962.74
Discount on Bonds Payable	91,037.26
7% Bonds Payable		560,000
(Being bonds issued at discount)

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