Question

A company issues bonds with a par value of $590,000. The bonds mature in 5 years and pay 9% annual interest in semiannual payments. The annual market rate for the bonds is 12%. (Table B.1, Table B.2, Table B.3, and Table B.4) (Use appropriate factor(s) from the tables provided.) 1. Compute the price of the bonds as of their issue date. 2. Prepare the journal entry to record the bonds’ issuance.

Answer 1

1]	Price of a bond, is the sum of the PV of the maturity
	value of the bond and the PV of periodic interest payments
	when discounted at the YTM.
	Here, the maturity value is $590,000 receivable at EOY 5--
	that is after 5*2 = 10 half years.
	The half yearly interest = 590000*9%/2 =	$            26,550
	There are 10 half years and the interest payment is an
	ordinary annuity.
	The discount rate is 9%/2 = 4.5%.
	PV of maturity value = 590000*PVIF(4.5,10) = 590000*0.55839 =	$ 3,29,450
	PV of interest payments = 26550*PVIFA(4.5,10) = 26550*7.36009 =	$ 1,95,410
	Price of the bonds	$ 5,24,860
2]	Cash	$ 5,24,860
	Discount on bonds payable	$            65,140
	Bonds payable