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 |

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