P10-9 Recording and Reporting Bonds Issued at a Peim LO10-5 [The following infor
ID: 2566426 • Letter: P
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P10-9 Recording and Reporting Bonds Issued at a Peim LO10-5 [The following information applies to the questions displayed below Cron Corporation is planning to issue bonds with a face value of $870,000 and a coupon rate of 13 percent. The bonds mature in five years and pay interest semiannually every June 30 and December 31. All of the bonds were sold on January 1 of this year. Cron uses the effective-interest amortization method. Assume an annual market rate of interest of 12 percent. (FV of $1, PV of $1. FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.)Explanation / Answer
Face value of bonds = $870,000
Coupon rate = 13% * 6/12 = 6.5% Per period
Term = 5 Years * 2 = 10 Periods
Market interest rate, I = 12% *6/12 = 6% Per period
Issue price = Coupon amount*PVIFA(I,n) + F.V * PVIF(I,n)
= $870,000 * 6.5% * PVIFA(6%,10) + $870,000*PVIF(6% , 10)
= $56,550 * 7.3601 + $870,000 * 0.5584
= $902,021.655
Amount of premium = $902,021.655 - $870,000
= $32,021.655
Interest expenses for period June 30 = Book value * I
= $902,021.655*6%
= $54,121.2993
Amortization of premium for first period = $56,550 - $54,121
= $2,429
Book value of bond's at June 30 = $902,021 - $2,429
= $899,592
Interest expenses for period Dec 31 = $899,592 * 6%
= $53,975.52
Amortization of premium for 2nd period = $56,550 - $53,976
= $2,574
Book value of bond's at the end of Dec 31 = $899,592 - $2,574
= $897,018
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