Question

Bringham Company issues bonds with a par value of $640,000. The bonds mature in 6 years and pay 7% annual interest in semiannual payments. The annual market rate for the bonds is 10%. (Table B.1, Table B.2, Table B.3, and Table B.4) (Use appropriate factor(s) from the tables provided.) 1. Compute the price of the bonds as of their issue date. 2. Prepare the journal entry to record the bonds’ issuance.

Answer 1

Solution: 1
	CALCULATION OF ISSUE PRICE OF THE BONDS
	Step 1 : Calculation of Semi Annual Coupon Payments
	Par value of the bond issued is   =		$640,000
	Annual Coupon %			7.00%
	Annual Coupon Amount			$44,800
	Half Year Coupon Amount =			$22,400
	Step 2: Calculate number of years to Maturity
	Number of years to maturity = 6 years
	No. of Years Period = 6 Years X 2 Period =	12	Periods
	Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds
	Market rate of interest or Yield to Maturity or Required Return =	10%
	Half yearly Discount rate = 10 % / 2		5%
	PVF = 1 / Discount rate = 1/ 1.05
	Result of above will again divide by 1.05 , repeat this lat period
	Period	Interest	Amount (In Million)	PVF of $ 1 @ 5%	PresentValue
	1	Interest	$                           22,400	0.9524	$             21,333
	2	Interest	$                           22,400	0.9070	$             20,317
	3	Interest	$                           22,400	0.8638	$             19,350
	4	Interest	$                           22,400	0.8227	$             18,429
	5	Interest	$                           22,400	0.7835	$             17,551
	6	Interest	$                           22,400	0.7462	$             16,715
	7	Interest	$                           22,400	0.7107	$             15,919
	8	Interest	$                           22,400	0.6768	$             15,161
	9	Interest	$                           22,400	0.6446	$             14,439
	10	Interest	$                           22,400	0.6139	$             13,752
	11	Interest	$                           22,400	0.5847	$             13,097
	12	Interest	$                           22,400	0.5568	$             12,473
	12	Bond Principal Value	$                         640,000	0.5568	$          356,376
		Total			$          554,913
		Price of The Bond=			$          554,913
	Answer = Price of The Bond = $ 554,913
Solution: 2
	Account Title and explanation		Debit	Credit
	Cash		$554,913
	Discount on issuance of Bonds	$85,087
	Bonds Payable			$640,000