Question

5. On June 30, 2018, Singleton Computers issued 5% stated rate bonds with a face amount of $320 million. The bonds mature on June 30, 2033 (15 years). The market rate of interest for similar bond issues was 4% (2.0% semiannual rate). Interest is paid semiannually (2.5%) on June 30 and December 31, beginning on December 31, 2018. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. Determine the price of the bonds on June 30, 2018. 2. Calculate the interest expense Singleton reports in 2018 for these bonds using the effective interest method.

Answer #1

1 | |||||||||

Table values are based on: | |||||||||

n = 30 | |||||||||

i=2.5% | |||||||||

Cash Flow | Amount | Present Value | |||||||

Interest | 6400000 | 133953856 | =6400000*20.93029 | Present value of an ordinary annuity of $1:n= 30,i= 2.5% (from PVA of $1) | |||||

Principal | 320000000 | 152556800 | =320000000*0.47674 | Present value of $1:n= 30,i= 2.5% (from PV of $1) | |||||

Price of bonds |
286510656 |
||||||||

2 | |||||||||

PeriodEnd | Cash Interest Paid | Bond Interest Expense | Discount Amortization | Carrying Value | |||||

6/30/2016 | 286510656 | ||||||||

12/31/2016 | 6400000 | 7162766 | 762766 | 287273422 | |||||

Cash interest paid = 320000000*2% = $6400000 | |||||||||

Bond Interest Expense = 286510656*2.5% = $7162766 | |||||||||

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