Question

12a) On September 1, 2021, Anne Teak Furniture issued $1,800,000 of its 11% bonds at 94 plus accrued interest. The bonds are dated June 1, 2021 and have an effective interest rate of 12%. Interest is payable semiannually on June 1 and December 1. At the time of issuance, Anne Teak Furniture would receive cash of:

Multiple Choice

• $1,642,500.

• $1,741,500.

• $1,808,811.

• $1,692,000

12b) On January 1, 2021, Anne Teak Furniture issued $100,000 of 10% bonds, dated January 1. Interest is payable semiannually on June 30 and December 31. The bonds mature in 15 years. The annual market rate for bonds of similar risk and maturity is 12%. What was the issue price of the bonds? (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.)

Multiple Choice

• $89,273.

• $94,273.

• $86,235.

• $40,549.

Answer 1

Answer 12a)

Calculation of Amount of cash received at the time of at the time of issuance of bonds

Amount of cash received = Price of bonds + Accrued Interest

                                              = $ 1,692,000 + $ 49,500

                                              = $ 1,741,500

Therefore the amount of cash received on issue of bonds is $ 1,741,500.

Working Notes:

Calculation of price of Bonds

These bonds are issued at $ 94 against face value of $ 100. It implies that these bonds are issued are issued at a discount and thus the issue price is:

                   = ($ 1,800,000/ $ 100) * $ 94

                   = $ 1,692,000

Calculation of Accrued Interest

These bonds are dated June 1, 2021 and are issued on September 1, 2021 and since next interest payment is due on December 1, 2021. It implies that interest for 3 months is due on these bonds.

Accrued Interest = (Face value of bonds X Annual Rate of Interest X number of months of accrued interest)/12

                                            = ($ 1,800,000 X 11% X 3)/12

                                            = $ 49,500

Answer 12b)

Calculation of issue price of bonds

Issue price of bonds = (Maturity value X Present value factor at 6% for 30 semi-annual periods) + (Semi -Annual interest X Present value annuity factor at 6% for 30 semi-annual periods)

                                      = ($100,000 X 0.17411) + ($ 5,000 X 13.76483)

                                      = $ 17,411 + $ 68,824.15

                                      = $ 86,235.15 or $ 86,235 (rounded off)

Therefore the issue price of bonds is $ 86,235.

Working Notes:

1. Since the interest is payable semi-annually, number of periods is doubled and coupon interest (5%) on bonds and market value for discounting is halved (6%)

2. Semi-Annual interest = $ 100,000 X 5%

                                        = $ 5,000