lse 14-34 Bringham Company issues bonds with a par value of $800,000 on their st

Question

lse 14-34 Bringham Company issues bonds with a par value of $800,000 on their stated issue date. The bod m ture in 10 years and pay 6% annual interest in semiannual payments. On the issue date, the annual rate for the bonds is 8%. bond interest rice, recording 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,a premium 4. Compute the price of the bonds as of their issue date. s. Prepare the journal entry to record the bonds issuance.

Explanation / Answer

Solution:

Part 1 --- Amount of each semi-annual interest payment = Par Value x Stated Interest Rate x 1/2half yearly

= $800,000*6%*1/2

= $24,000

Part 2 --- Number of Semi Annual Interest Payment to be made = Tenure of bonds 10 x number of times interest to be paid in a year 2 = 20

20 Semi annual interest payment

Part 3 –

Stated Interest Rate = 6%

Market Interest Rate = 8%

It means investor will get 8% return of income if they invest in the market instead of getting 6% return from investing in bonds.

Hence, Investor would not be interested in getting low return and pay less amount than their par value to purchase the bonds.

Hence, the bonds are issued a discount.

Part 4 –

Semi Annual Market Interest Rate = 8/2 = 4%

Issue price of the bonds = Semi Annual Interest Payment x PVIFA (4%,20) + Par Value x PVIF (4%, 20)

=($24,000*13.59033) + ($800,000*0.45639)

= $326,168 + 365,112

= $691,280

Issue Price of the bonds = $691,280

Note -- Calculation of Present Value Factor (Rounded to 5 decimal places)

PVIFA (R, n) = Present Value interest factor for ordinary annuity at R% for n periods = (1 – 1/(1+R)n) / R

PVIFA (4%,20) = (1 – 1/(1+0.04)20) / 0.04 = 13.59033

PVIF (R, n) = Present Value interest factor for ‘n’ period at ‘R’% = 1/(1+R)n

PVIF (4%, 20) = 1/(1+0.04)20= 0.45639

Part 5 – Journal Entry to record the bond issuance

General Journal

Debit

Credit

Cash (Issue Price)

$691,280

Discount on Bonds Payable (Bal.fig)

$108,720

Bonds Payable (Par Value)

$800,000

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General Journal

Debit

Credit

Cash (Issue Price)

$691,280

Discount on Bonds Payable (Bal.fig)

$108,720

Bonds Payable (Par Value)

$800,000

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