Question

Item 3

Citywide Company issues bonds with a par value of $72,000 on their stated issue date. The bonds mature in ten years and pay 11% annual interest in semiannual payments. On the issue date, 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. What is the amount of each semiannual interest payment for these bonds?
2. How many semiannual interest payments will be made on these bonds over their life?
3. Use the interest rates given to select whether the bonds are issued at par, at a discount, or at a premium.
4. Compute the price of the bonds as of their issue date.
5. Prepare the journal entry to record the bonds’ issuance.

Answer 1

Req 1.
Par value of bonds				72000
Multiply: Stated rate of interest				11%
Annual interest payment				7920
Semi annual payment (7920/2)				3960
Req 2.
Life of bonds				10	years
Number of semi annual payments (10*2)				20	times
Req 3.
The bonds are issued at premium as the stated rate of interest is morre than the market rate prevailing.
Req 4.
n = 20
I = 5%
Cashflows		Amount	PVF at 5%	Present value
Semi annual interest		3960	12.46221	49350.3516
Maturity value		72000	0.376889	27136.008
Price of bonds				76486.3596
Journal entry for issuance
Date	Accounts title and explanations				Debit $	Credit $
	Cash account				76486.36
	Bonds payable					72000
	Premium on bonds payable					4486.36
	(for bonds issued at premium)