Question

In: Accounting

On January 1, 2018, Shirley Corporation purchased 12% bonds dated January 1, 2018, with a face...

On January 1, 2018, Shirley Corporation purchased 12% bonds dated January 1, 2018, with a face amount of $21 million. The bonds mature in 2027 (10 years). For bonds of similar risk and maturity, the market yield is 16%. Interest is paid semiannually on June 30 and December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required: Determine the price of the bonds at January 1, 2018.

Solutions

Expert Solution

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at market rate of interest, and

Discounted Interest payments amount (during the lifetime) at market rate of interest.

Annual Rate

Applicable rate

Face Value

$ 21,000,000.00

Market Rate

16.00%

8.00%

Term (in years)

10

Coupon Rate

12.00%

6.00%

Total no. of interest payments

20

Calculation of Issue price of Bond

Bond Face Value

Market Interest rate (applicable for period/term)

PV of

$21,000,000.00

at

8.0%

Interest rate for

20

term payments

PV of $1

0.21454821

PV of

$21,000,000.00

=

$       21,000,000.00

x

0.214548207

=

$ 4,505,512.36

A

Interest payable per term

at

6.0%

on

$      21,000,000.00

Interest payable per term

$      1,260,000.00

PVAF of 1$

for

8.0%

Interest rate for

20

term payments

PVAF of 1$

9.818147407

PV of Interest payments

=

$       1,260,000.00

x

9.818147407

=

$12,370,865.73

B

Bond Value (A+B)

$   16,876,378.09

Issue price of Bond = $ 16,876,378.09 or $16,876,378

Market rate is more than coupon rate hence bond is issued at discount.

ekkarill92 answered 2 years ago
Next > < Previous

Related Solutions

On January 1, 2018, Ras Alhd Corporation purchased 12% bonds dated January 1, 2018, with a...
On January 1, 2018, Ras Alhd Corporation purchased 12% bonds dated January 1, 2018, with a principal amount of OMR 120,000. The bonds mature in 2028 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31. What is the price of the bonds at January 1, 2018 Select one: a. OMR 120,000 b. OMR 138,694 c. OMR 108,000 d. OMR 101,306
On January 1, 2017, Shirley Corporation puchased 10% bonds dated January 1, 2017, with a face...
On January 1, 2017, Shirley Corporation puchased 10% bonds dated January 1, 2017, with a face amount of $10 million. The bonds mature in 10 years. For bonds of similiar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31. 1. record journal entry to record the bond purchase by Shirley on January 1, 2017 2. prepare journal entry to record interest on June 30, 2017, using the effective interest method. 3....
On January 1, 2018, Mania Enterprises issued 12% bonds dated January 1, 2018, with a face...
On January 1, 2018, Mania Enterprises issued 12% bonds dated January 1, 2018, with a face amount of $20.1 million. The bonds mature in 2027 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Required: 1. Determine the price of the bonds at January 1, 2018....
On January 1, 2018, Entity A issued 8% bonds dated January 1, 2018, with a face...
On January 1, 2018, Entity A issued 8% bonds dated January 1, 2018, with a face amount of $10 million. The bonds mature in 2022 (5 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31. A. What was the issue price of the bonds? B. Prepare the journal entry to record the bond issuance. C. Prepare the journal entry to record interest on June 30, 2018,...
On January 1, 2018, Entity A issued 8% bonds dated January 1, 2018, with a face...
On January 1, 2018, Entity A issued 8% bonds dated January 1, 2018, with a face amount of $10 million. The bonds mature in 2022 (5 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31. A. Prepare a partial balance sheet showing the bonds at December 31, assuming that Entity A had used the effective interest method from the inception. B. Why might a company utilize...
On January 1, 2018, Bishop Company issued 10% bonds dated January 1, 2018, with a face...
On January 1, 2018, Bishop Company issued 10% bonds dated January 1, 2018, with a face amount of $37 million. The bonds mature in 2027 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: Determine the price of...
On January 1, 2018, Bishop Company issued 8% bonds dated January 1, 2018, with a face...
On January 1, 2018, Bishop Company issued 8% bonds dated January 1, 2018, with a face amount of $20.2 million. The bonds mature in 2027 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided. Round your intermediate calculations to...
On January 1, 2018, Bishop Company issued 10% bonds dated January 1, 2018, with a face...
On January 1, 2018, Bishop Company issued 10% bonds dated January 1, 2018, with a face amount of $20 million. The bonds mature in 2027 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31. Required: 1. Determine the price of the bonds at January 1, 2018. 2. Prepare the journal entry to record the bond issuance by Bishop on January 1, 2018. 3. Prepare the...
On January 1, 2018, King Co. issued 10% bonds dated January 1, 2018, with a face...
On January 1, 2018, King Co. issued 10% bonds dated January 1, 2018, with a face amount of $19.2 million. The bonds mature in 2027 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided. Round your intermediate calculations to...
On January 1, 2018, Bishop Company issued 10% bonds dated January 1, 2018, with a face...
On January 1, 2018, Bishop Company issued 10% bonds dated January 1, 2018, with a face amount of $19.6 million. The bonds mature in 2027 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided. Round your intermediate calculations to...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT