On June 30 of the current year, Rural Gas & Electric Co. issued $50,000,000 face

Question

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

a compute the issue price for the ond that results in an effective semiaannual interest rate of 5%

b. prepare a journal entry to record the issuance of the bonds at the sales price you computed in part a

c. explain why the bonds were issued at a discount

Explanation / Answer

coupon payment = 9%*50,000,000/2 = $2250000

a. Issue price = 2250000/(1+5%/2) + 2250000/(1+5%/2)^2 + 2250000/(1+5%/2)^3 .......2250000/(1+5%/2)^20 + 50,000,000/(1+5%/2)^20 =65,589,162.29

b. Bond discount =65,589,162.29-$50,000,000 =$15,589,162.29

Dr Cash $65,589,162.29
Dr Bonds discount $15,589,162.29

Cr Bonds payable $50,000,000

c. Bonds were issued at discount because their issue price was more than the face value

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