Lorance Corporation issued $400,000, 7%, 20-year bonds on December 31, 2017, for

Question

Lorance Corporation issued $400,000, 7%, 20-year bonds on December 31, 2017, for $360,415 at a time when the effective rate of interest was 8%. Interest is payable semiannually on June 30 and December 31. Lorance uses the effectiveinterest method to amortize bond premium or discount. (a) Show the set up of the basic bond information. (b) The bond price for this exercise is given as $360,415. Using present value discounting techniques, compute the bond price—you should get $360,415. (c) Why was this bond issued at a discount?

Explanation / Answer

Lorance Corporation issued $400,000, 7%, 20-year bonds on December 31, 2017, for

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