value Required information 3.33 points 2. The market interest rate is 7% and the

Question

value Required information 3.33 points 2. The market interest rate is 7% and the bonds issue a a discount. O and o use a ro ate actor s om he ables provided. Do not round interest teac ors. Required Information Interest Increase in Date Cash Paid The following information applies to the questions displayed below Expense Carrying Value Carrying Value 01/01/18 06 3018 12/31/18 Coney Island Entertainment issues $1,000,000 of 6% bonds, due in 15 years, with interest payable semiannually on June 30 and December 31 each year. Calculate the issue price of a bond and complete the first three rows of an amortization schedule when: References eBook & Resources Worksheet Learning Objective: 09-05 Determine the price of a bond issue. Learning Objective: 09-06 Account for the issuance of bonds. Difficulty: 2 Medium

Explanation / Answer

(a) Finding out Issue price of the bond :

Amount due after 15 years = $1,000,000 say A

Rate of interest = 6% per annum or 3% per half year ( as the interest is payable on 30 June and 31 Dec) say r

Period = 15 years or 30 half years say n

Assume the issue price of bonds be P

Now , issue price is amount which compounded by interest in 30 half years become 1,000,000 so

1,000,000 = P*(1+r)^n

1,000,000= P*(1+.03)^30

1,000,000= P*(1.03)^30

P= 1,000,000/(1.03)^30 i.e. 411,987 ( please note that in question reference to PV factor has been given but I am not able to see the value so I solved this by formula. The result can be got by multiplying the amout with annual PV factor)

(b)

01/01/18 : Carrying value = 411,987

06/30/18 : Cash Paid = NIL ; interest expense = 411,987*3%= 12,359 ; Increase in carrying value = 12,359 , Carrying value = 424,346

12/31/18 : Cash Paid = NIL ; interest expense = 424,346 *3% =12,730 ; increase in carrying value = 12,730 ; Carrying value = 437,076.

Thanks

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