On July 1, 2017, Mirage Company issued $250 million of bonds with an 8% coupon i

ID: 2561304 • Letter: O

Question

On July 1, 2017, Mirage Company issued $250 million of bonds with an 8% coupon interest
rate. The bonds mature in 10 years and pay interest semiannually on June 30 and December 31
of each year. The market rate of interest on July 1, 2017, for bonds of this risk class was 8%.
Mirage closes its books on December 31. Ignore income taxes.
Required:
1. At what price were the bonds issued?
2. On July 1, 2019, the market interest rate for bonds of this risk class is 6%. What is the fair
value of the bonds on this date?
3. Suppose that 50% of the bonds were repurchased for cash on July 1, 2019, at the market
price. What journal entry would the company make to record this partial retirement?

Explanation / Answer

Solution:

1) Since the market rate of interest on the issue of Bonds date was 8% which is same as stated interest rate of bonds, the bonds were issued at par. Issue price of the bonds issued = $250 million

Remaining semi annual maturity period (n) = 10*2 – 4 = 16

Semi Annual Coupon Interest = Par Value 250 Million x Stated Interest Rate 8% x ½ = $10 million

Semi Annual Market Interest Rate= 6% / 2 = 3%

Fair Value of the bonds on July 1, 2019 = Semi Annual Coupon Interest x PVIFA (3%, n) + Par Value x PVIF (3%, n)

= ($10*12.561) + (250*0.623)

= $125.61 + 155.75

= $281.36

Fair Value of the bonds on July 1, 2019 = $281.36 million

Carrying Value of the bonds as on July 1, 2019 = $250 million

Market Price of the bonds on July 1, 2019 = $281.36 million

Premium to be paid on retirement of Bonds payable = 281.36 – 250 = 31.36 million

Journal entry

Date

Accounts

Debit

Credit

July.1, 2019

Bonds Payable (50%*250 million)

$125.00

Premium on Retirement on Bonds

$15.68

Cash (281.36 Million x 50%)

$140.68

(50% bonds retirement recorded at premium)

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