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