Question
Tables:
http://lectures.mhhe.com/connect/0078111048/Appendix B/exhibitb-7.jpg
http://lectures.mhhe.com/connect/0078111048/Appendix B/exhibitb-9.jpg
Use Table PV-1 (in Exhibit B-7) and Table PV-2 (in Exhibit B-9) On June 30 of the current year, Rural Gas & Electric Co. issued $50,000,000 face value, 9 percent, 10-year bonds payable, with interest dates of December 31 and June 30. The bonds were issued at a discount, resulting in an effective semiannual interest rate of 5 percent. Compute the issue price for the bond that results in an effective semiannual interest rate of 5 percent. (Hint: Discount both the interest payments and the maturity value over 20 semiannual periods.) (Round your PV factor to 3 decimal places and final answer to the nearest dollar amount. Omit the "$" sign in your response.) Prepare a journal entry to record the issuance of the bonds at the sales price you computed in part a.(Round your PV factor to 3 decimal places and final answer to the nearest dollar amount. Omit the "$" sign in your response.) Why were the bonds issued at a discount? The bonds were sold at a discount because the coupon rate of interest, 9%, was less than the market rate of interest, 10%. The bonds were sold at a discount because the coupon rate of interest, 10%, was more than the market rate of interest, 9%.
Explanation / Answer
FV = 50,000,000 Coupon 9% HY = 9%*50000,000/2 = $2,250,000 Tenure = nper = 10*2 = 20 periods Eff semiannual rate = 5% = (1+i/2)^2 -1 So (1+i/2)^2 = 1+5% = 1.05 So (1+i/2) = Sqrt(1.05) = 1.0247 so i = 0.0247*2 = 4.94% So HY Rate = 4.94% So Issue price of Bond = PV(Rate,nper,pmt,FV) = PV(4.94%,20,2250000,50000000) = 47,244,312 ....Ans (a) b. Jun 30 Cash Dr 47,244,312 Disc on Bond payable Dr $2,755,688 Bond Payable Cr 50,000,000 c. Bond is sold at disc as coupon rate 9% is less than Mkt rate of 10%
