Analyzing and Reporting Financial Statement Effects of Bond Transactions On Janu

Question

Analyzing and Reporting Financial Statement Effects of Bond Transactions On January 1, 2012, Trueman Corporation issued $500,000 of 20-year, 11% bonds for $462,384, yielding a market (yield) rate of 12%. Interest is payable semiannually on June 30 and December 31.

(a) Confirm the bond issue price. (Use a financial calculator or Excel to compute. Round answers to the nearest whole number.) Present value of principal repayment =$Answer 0 Incorrect Present value of interest payments =$Answer 0 Incorrect Selling price of bonds =$ 462,384

(b) Indicate the financial statement effects using the template for (1) bond issuance, (2) semiannual interest payment and discount amortization on June 30, 2012, and (3) semiannual interest payment and discount amortization on December 31, 2012. (Round answers to the nearest whole number.)

Please explain the answer

Explanation / Answer

A. Calculation of Bond Price

If r is the interest rate prevailing in the market, c is the coupon rate on the bond, t is the time periods occurring over the term of the bond and F is the face value of the bond, the present value of interest payments is calculated using the following formula:

Price of Bond ( Semiannually) = 5.5% × 500,000 × 1 (1 + 6%)-(20*2) + $500,000
6%   (1 + 6%)^40

Price of Bond =$ 462,384

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