xample #5, On January 1, 2016 a company issues 100 bonds, each for $1,000, for a

Question

xample #5, On January 1, 2016 a company issues 100 bonds, each for $1,000, for a premium as the interest rate on the bond (stated/coupon rate) is 5% and the market rate is 4%. They then used this cash to purchase an automobile for $100,000 cash. The bond is to be paid in at the end of THREE years (December 31, 2018) Cash received from issuing bond Present value of maturity payment $100,000 Present value of interest payment ($100,000*.05-$5,000) Present value of cash payments Date 1/1/2016 Account Name Debit Credit 12/31/2016 (Premium balance: 2,775.09-889.00-1,886.09) Date 12/31/2017 Account Name Debit Credit (Premium balance: 1,886.09-924.56-961.53) Account Name Debit Credit Date 12/31/2018 (Premium balance is now zero)

Explanation / Answer

Present value of maturity payment 100000 0.88899 88899.64 Present value of interest payment 5000 2.77509 13875.45 present value of cash payment 102775.09 1.1.2016 Cash 102775.09          Bonds payable 100000          Premium on bonds payable 2775.09 31.12.2016 Interest expense 4111 Premium on bonds payable 889          Cash 5000 31.12.2017 Interest expense 4075.44 Premium on bonds payable 924.56          Cash 5000 31.12.2018 Interest expense 4038.47 Premium on bonds payable 961.53 Bonds payable 100000          Cash 105000

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