Question

On June 30, 2021, Singleton Computers issued 4% stated rate bonds with a face amount of $100 million. The bonds mature on June 30, 2036 (15 years). The market rate of interest for similar bond issues was 5% (2.5% semiannual rate). Interest is paid semiannually (2.0%) on June 30 and December 31, beginning on December 31, 2021. (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:
1. Determine the price of the bonds on June 30, 2021.
2. Calculate the interest expense Singleton reports in 2021 for these bonds using the effective interest method.

• Required 1
• Required 2

Determine the price of the bonds on June 30, 2021. (Enter your answers in whole dollars. Round percentage answers to one decimal place. Round your final answers to nearest whole dollar amount.)

	Table values are based on: n = i = Cash Flow Amount Present Value Interest Principal Price of bonds

Calculate the interest expense Singleton reports in 2021 for these bonds using the effective interest method. (Enter your answers in whole dollars. Round your final answers to nearest whole dollar amount.)

	Period-End Cash Interest Paid Bond Interest Expense Premium Amortization Carrying Value 06/30/2021 12/31/2021

Answer 1

Correct Answer:

Requirement 1:

table values are based on:
n =	30
I =	5%
Cash flow	Amount	Present value
Interest	$             2,000,000	$       41,860,585.186
Principal	$        100,000,000	$                47,674,269
Price of Bonds		89,534,853.70

Working:

Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$             100,000,000	at	2.50%	Interest rate for	10	term payments
PV of $1	0.47674
PV of	$             100,000,000	=	$         100,000,000	x	0.47674	=	$           47,674,000	A
Interest payable per term	at	2%	on	$                   100,000,000
Interest payable per term	$                 2,000,000
PVAF of 1$	for	2.5%	Interest rate for	30	term payments
PVAF of 1$	20.93029
PV of Interest payments	=	$ 2,000,000.00	x	20.93029	=		$           41,860,580	B
				Bond Value (A+B)			$           89,534,580

Requirement 2:

Interest expense = $ 2,238,371.34

Working:

Effective Interest Amortization Table
Formula Used	(100,000,000*4%) / 2	Last year’s Carrying value of bond* Market Rate of Interest (5%)	Interest Expense - Cash Paid	Last year's Carrying value of Bond - current year's Premium amortized
Date	cash paid	Interest Expense	Discount Amortized	Carrying value of Bond
06-30 2021		-	-	$     89,534,850.00
12-31-2021	$ 2,000,000.0	$ 2,238,371.34	$ 238,371.34	$     89,773,221.25

End of answer.

Thanks.