On January 1, 2014, Ellison Co. issued eight-year bonds with a face value of $3,

Question

On January 1, 2014, Ellison Co. issued eight-year bonds with a face value of $3,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are:

Present value of 1 for 8 periods at 6%...........................................         .627

Present value of 1 for 8 periods at 8%...........................................         .540

Present value of 1 for 16 periods at 3%.........................................         .623

Present value of 1 for 16 periods at 4%.........................................         .534

Present value of annuity for 8 periods at 6%.................................       6.210

Present value of annuity for 8 periods at 8%.................................       5.747

Present value of annuity for 16 periods at 3%...............................     12.561

Present value of annuity for 16 periods at 4%...............................     11.652

The present value of the principal is

a.   $2,136,000.

b.   $1,602,000.

c.   $2,492,000.

d.   $1,508,000.

The present value of the interest is

a.   $1,048,680.

b.   $1,398,240.

c.   $1,390,400.

d.   $1,307,320.

The issue price of the bonds is

a.   $3,534,240.

b.   $2,650,680.

c.   $3,558,240.

d.   $2,998,400.

Explanation / Answer

Present value of the principal =3,000,000 X 0.534 = $ 1,602,000 Present value of the interest = 3,000,000 X3% X11.652 = $ 1,048,680 The Issue price of the bonds =1,602,000+1,048,680 =2,650,680

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