1) Adonis Corporation issued 10-year, 7% bonds with a par value of $190,000. Int
ID: 2596722 • Letter: 1
Question
1) Adonis Corporation issued 10-year, 7% bonds with a par value of $190,000. Interest is paid semiannually. The market rate on the issue date was 6%. Adonis received $204,138 in cash proceeds. Which of the following statements is true?2)A company issued 7%, 15-year bonds with a par value of $480,000 that pay interest semiannually. The market rate on the date of issuance was 7%. The journal entry to record each semiannual interest payment is: 1) Adonis Corporation issued 10-year, 7% bonds with a par value of $190,000. Interest is paid semiannually. The market rate on the issue date was 6%. Adonis received $204,138 in cash proceeds. Which of the following statements is true?
2)A company issued 7%, 15-year bonds with a par value of $480,000 that pay interest semiannually. The market rate on the date of issuance was 7%. The journal entry to record each semiannual interest payment is:
2)A company issued 7%, 15-year bonds with a par value of $480,000 that pay interest semiannually. The market rate on the date of issuance was 7%. The journal entry to record each semiannual interest payment is:
Explanation / Answer
1. Formula for calculating bond price is = C x Fx [1- (1+r)-t]/r + [F/(1+r)t]
Where, C = Coupon rate of the bond = 7%/2 = 3.5% or 0.035 (Semi-annual rate)
r = Interest rate at the market = 6%/2 = 3% or 0.030 (Semi-annual rate)
F = Face value of the bond = $ 190,000
t = time period for over the term of the bond = Ten years semi-annually = 10*2 = 20
So, Bond price = 0.035 x 190,000 x [1- (1+ 0.03)-20]/0.030 + [190,000/(1+0.030)20]
= 6,650 x [1- (1/1.806)]/0.030 + (190,000/1.806)
= 6650 x 14.88 + 105198.39
= 98935.21 + 105198.39
= $ 204,133.6
Yes, the statement is true. The difference in amount came here is because of the approximation decimal numbers after point.
2. Journal Entry to record each semi-annual interest payment
Interest Expense [( 480000*7%)/2] Dr. $ 16,800
Cash Cr. $ 16,800
(Semi-annual interest paid on Bonds payable)
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