On January 1, 2013, Lowry Company issued ten-year bonds with a face value of $50
ID: 2462458 • Letter: O
Question
On January 1, 2013, Lowry Company issued ten-year bonds with a face value of $500,000 and a stated interest rate of 10%, payable semiannually on June 30 and December 31. The market rate for bonds of this type would be 12%.
REQUIRED:
(a) Calculate the issue price of the bonds and the journal entry to record the issuance.
(b) Suppose that the issuance date had been April 1, 2013 for bonds that were dated January 1, 2013. How would the journal entry have changed for the issuance of the bonds?
In the (b), I want to know how much interest for the first 3 months? Is it $12,500? Because: 500,000 * 5% * 3/6 = 12,500. Because 5% is half year interest rate. Is that right?
Explanation / Answer
Present value of 1 for 10 periods at 10% ..................................386
Present value of 1 for 10 periods at 12% ..................................322
Present value of 1 for 20 periods at 5% ....................................377
Present value of 1 for 20 periods at 6% ....................................312
Present value of annuity for 10 periods at 10% ........................6.145
Present value of annuity for 10 periods at 12% ........................5.650
Present value of annuity for 20 periods at 5% ..........................12.462
Present value of annuity for 20 periods at 6% ..........................11.470
a) Issue Price of the Bonds = 0.312 *$5,00,000 = $1,56,000
11.470*$ 25,000 = $286750
Yes your interest calculation is Correct if we ignore time value of money for the 3 months @ 10% interest rate
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