1. ABC Company issues 10% 10-year bonds with a face value of $X and the bonds pa
ID: 2493105 • Letter: 1
Question
1. ABC Company issues 10% 10-year bonds with a face value of $X and the bonds pay interest twice a year on June 30 and Dec 31. The market interest rate at the date of issue is 12% and the bonds sell for $265,588.50
(1) Compute the face value of the bonds. Descriptively show your workings and round your answers to zero decimal points. (5 points)
(2) Record the journal entry at maturity of bond. Ignore the interest payment entry. (2 points)
2. ABC Company issues X% 10-year bonds with a face value of $100,000, and the bonds pay interest once a year on Dec 31. The market interest rate at the date of issue is 12% and the bonds sell for $88,702.
(1) Record the journal entry at the issue date. (2 points)
(2) Compute the amount of each interest payments that ABC pays every Dec 31. Descriptively show your workings and round your answer to zero decimal points. (4 points)
(3) Compute the coupon rate of the bonds. Descriptively show your workings and round your answer to zero decimal points. (2 points)
(4) Record the journal entry at maturity of bond. Ignore the interest payment entry. (2 points)
Explanation / Answer
1 Bond face value Assume face value= x interest = 0.10x 1 Period Inerest +Maturity Discount Factor @6% PV Factor 1 0.10*x 0.9434 0.0943 2 0.10x 0.8900 0.0890 3 0.10x 0.8396 0.0840 4 0.10x 0.7921 0.0792 5 0.10x 0.7473 0.0747 6 0.10x 0.7050 0.0705 7 0.10x 0.6651 0.0665 8 0.10x 0.6274 0.0627 9 0.10x 0.5919 0.0592 10 0.10x 0.5584 0.0558 11 0.10x 0.5268 0.0527 12 0.10x 0.4970 0.0497 13 0.10x 0.4688 0.0469 14 0.10x 0.4423 0.0442 15 0.10x 0.4173 0.0417 16 0.10x 0.3936 0.0394 17 0.10x 0.3714 0.0371 18 0.10x 0.3503 0.0350 19 0.10x 0.3305 0.0331 20 1.10X 0.3118 0.3430 1.4588 So 1.4588x=265588.50 x= 182,060 So face value of bond = $ 182,060 Journal entry at maturity of bond Account title Dr $ Cr $ Bond Payable 182,060 Cash 182,060 2 Bond valuation Face value 100,000 Assume interest x % Interear amt 100000x 1 Period Inerest +Maturity Discount Factor @12% PV Factor 1 100000x 0.8929 89,285.71 2 100000x 0.7972 79,719.39 3 100000x 0.7118 71,178.02 4 100000x 0.6355 63,551.81 5 100000x 0.5674 56,742.69 6 100000x 0.5066 50,663.11 7 100000x 0.4523 45,234.92 8 100000x 0.4039 40,388.32 9 100000x 0.3606 36,061.00 10 100000+100000x 0.3220 32,197.32 plus32197.32 for maturity 565,022.30 so 565022.30x+32197.32=88702 565022.3x= 56,505 x 10.00% 3 Therefore the interest rate is 10% Face value 100,000 Bond price 88,702 Discount 11,298 Interest payment 10,000 2 So Interest paymentat Dec31= $ 10,000 Discount amortization schedule with intersest expense in given below Interest payment Interest expense@12% Discount Amortization Bond book value Year1 10,000 10,644 644 89,346 Year2 10,000 10,722 722 90,068 Year3 10,000 10,808 808 90,876 Year4 10,000 10,905 905 91,781 Year5 10,000 11,014 1,014 92,795 Year6 10,000 11,135 1,135 93,930 Year7 10,000 11,272 1,272 95,202 Year8 10,000 11,424 1,424 96,626 Year9 10,000 11,595 1,595 98,221 Year10 10,000 11,787 1,787 100,008 Journal entry issue date 1 Account Title Dr $ Cr$ Cash 88,702 Discount on Bond 11,298 Bond Payable 100,000 4 Journal entry maturity date Account Title Dr $ Cr$ Cash 100,000 Bond Payable 100,000
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