Company A issues bonds with a par value of $800,000 on their stated issue date.

Question

Company A issues bonds with a par value of $800,000 on their stated issue date. The bonds mature in 10 years and pay 6% annual interest in semiannual payments. On the issue date, the annual market rate for the bonds is 8%.
1. What is the amount of each semiannual interest payment for these bonds?
2. How many semiannual interest payments will be made on these bonds over their life?
3. Use the interest rates given to determine whether the bonds are issued at par, at a discount, or at a premium.
4. Compute the price of the bonds as of their issue date.
5. Prepare the journal entry to record the bonds' issuance.

Explanation / Answer

a Amount of semi annual interest payments 24,000.00 (800,000*0.06*1/2) 365,109.56 b Number of Semi Annual Interest Payments 10*2 Number of Semi Annual Interest Payments 20.00 c To determine whether the bonds are sold at premium,par or discount, Step1 Discount 800,000 at market rate of 8% to present value From the Present Value Factor tables: PVF(20,4%) 0.46 Hence, PV of 800,000 364,800.00 (A) Step2, Discount Interest payments to present value using the same rate From the Present Value of Annuity tables, PVOAF(20,4%) 13.59 Hence ,PV 326,167.83 (B) Market Value of Bonds 690,967.83 Hence,the bonds will be sold at discount Discount(800,000-690,967.83) 109,032.17 Journal Entry : Cash 690,967.83 Discount on Issue of Bonds Payable 109,032.17 Bonds Payable 800,000.00

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.