Question

Financial Statement Impact

On July 1, 2014 Botwin Company issues $1,000,000, 10%, bonds payable due in 10 years. Click here and use the slider to select the relevant interest rate to answer the following questions.

1.a.	If the market rate of interest is 12%, what is the issue price of the bonds payable?
	$

b.	If the market rate of interest is 12%, what is the discount on the bonds payable?
	$

c.	If the market rate of interest is 12%, what is the carrying amount of the bonds payable on the date of issuance?
	$

d.	If the market rate of interest is higher than the contract rate of interest, the bonds will sell for less than their face value.

2.a.	If the market rate of interest is 14%, what is the selling price of the bonds payable?
	$

b.	If the market rate of interest is 14%, what is the discount on the bonds payable?
	$

c.	If the market rate of interest is 14%, what is the carrying amount of the bonds payable on the date of issuance?
	$

d.	If the contract rate of interest remains constant, the amount of the discount when the bond is issued will increase as the market rate of interest increases.

Answer 1

Face Value of Bonds = $1,000,000

Annual Coupon Rate = 10%
Semiannual Coupon Rate = 5%
Semiannual Coupon = 5% * $1,000,000
Semiannual Coupon = $50,000

Time to Maturity = 10 years
Semiannual Period to Maturity = 20

Answer 1.

Annual Interest Rate = 12%
Semiannual Interest Rate = 6%

Issue Price of Bonds = $50,000 * PVIFA(6%, 20) + $1,000,000 * PVIF(6%, 20)
Issue Price of Bonds = $50,000 * (1 - (1/1.06)^20) / 0.06 + $1,000,000 / 1.06^20
Issue Price of Bonds = $885,301

Discount on Bonds Payable = Face Value of Bonds - Issue Price of Bonds
Discount on Bonds Payable = $1,000,000 - $885,301
Discount on Bonds Payable = $114,699

Carrying Amount on Issuance = $885,301

Answer 2.

Annual Interest Rate = 14%
Semiannual Interest Rate = 7%

Issue Price of Bonds = $50,000 * PVIFA(7%, 20) + $1,000,000 * PVIF(7%, 20)
Issue Price of Bonds = $50,000 * (1 - (1/1.07)^20) / 0.07 + $1,000,000 / 1.07^20
Issue Price of Bonds = $788,120

Discount on Bonds Payable = Face Value of Bonds - Issue Price of Bonds
Discount on Bonds Payable = $1,000,000 - $788,120
Discount on Bonds Payable = $211,880

Carrying Amount on Issuance = $788,120