Question

Coney Island Entertainment issues $1,000,000 of 5% bonds, due in 15 years, with interest payable semiannually on June 30 and December 31 each year.

**3.** The market interest rate is 4% and the bonds
issue at a premium. (FV of $1, PV of $1, FVA of $1, and PVA of $1)
**(Use appropriate factor(s) from the tables provided. Do not
round interest rate factors.)**

Issue price |

date | cash paid | interest expense | decrease in carrying value | carrying value |

01/01/18 | ||||

06/30/18 | ||||

12/31/18 |

Answer #1

Face value = $1,000,000

Coupon payment = $1,000,000 * 5% * 6/12 = $25,000

No. of payments = 15 * 2 = 30

Market rate = 4% / 2 = 2%

Issue price = Present value of coupon payment + Present value of
maturity

= ($25,000 * PVAF 2% 30) + ($1,000,000 * PVF 2% 30)

= ($25,000 * 22.39646) + ($1,000,000 * 0.55207)

= $1,111,981.50

Interest expense = Last Carrying value * 4% * 6/12

Decrease in Carrying Value = Cash paid - Interest expense

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