On January 1, 2014, Antonio Company issued $850,000 in bonds that mature in 10 y

Question

On January 1, 2014, Antonio Company issued $850,000 in bonds that mature in 10 years. The bonds have a stated interest rate of 6 percent and pay interest on June 30 and December 31 each year. When the bonds were sold, the market rate of interest was 12 percent. The company uses the straight-line amortization method. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.) 1. What was the issue price on January 1, 2014? 2. What amount of interest expense should be recorded on (a) June 30, 2014? and (b) December 31, 2014?3. What amount of cash interest should be paid on (a) June 30, 2014? and (b) December 31, 2014? 4. What is the book value of the bonds on (a) June 30, 2014? and (b) December 31, 2014?

Explanation / Answer

Issue price = 850000

Coupon rate = 6%

Number of payments in a year = 2

Number of years = 10

Total payments = 2*10 = 20

Market rate = 12%

Value of the bond = Cumulation of PV of cash flows for period 20 at 6%(12/2)

Issue value = 557517

Interest payment = 850000*6%/6/12 = 25500

Book value =

Year Payments pv PV of cash flows 1 25500 0.94339623 24056.60377 2 25500 0.88999644 22694.90922 3 25500 0.83961928 21410.29172 4 25500 0.79209366 20198.38841 5 25500 0.74725817 19055.08341 6 25500 0.70496054 17976.49378 7 25500 0.66505711 16958.9564 8 25500 0.62741237 15999.01547 9 25500 0.59189846 15093.41082 10 25500 0.55839478 14239.06681 11 25500 0.52678753 13433.0819 12 25500 0.49696936 12672.71877 13 25500 0.46883902 11955.39507 14 25500 0.44230096 11278.67459 15 25500 0.41726506 10640.25905 16 25500 0.39364628 10037.98023 17 25500 0.37136442 9469.792674 18 25500 0.35034379 8933.766674 19 25500 0.33051301 8428.081768 20 875500 0.31180473 272985.0384 557517.0089

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