Question

July 1. Mr. Burns issued $600,000, 10 years (semi annual payments) coupon rate of 10%, market rate of 12%. Mr. Smithers gave this bond the code name Bond #1July 1. Mr. Burns issued $600,000, 10 years (semi annual payments) coupon rate of 10%, market rate of 12%. Mr. Smithers gave this bond the code name Bond #1

32. December 31: Mr. Burns made interest payment on Bond #1. Use effective interest method. The payments are considered to be ordinary annuities

Interest Expense

Discount on Bonds Payable

Cash

Answer 1

Figures in $

Face value of the bond	600,000
Term	10 years
Coupon rate	10% (paid semiannually)
Market rate	12%
Because the given bond's coupon rate is less than the market rate, the bond is issued at a discount price.
In order to find the discounted price of the bond, we will use the following inputs
Future value (FV)	600,000
No. of period (n) (being semiannual)	20
Discounting rate (market rate) (r) (for 6 months)	6%
Coupon payments rate (C) (for 6 months)	5%
Therefore, applying the present value formula : PV = C*(1-(1+r)^-n)/r + FV/(1+r)^n, we get the discounted value as 531,180.4727
Discount on the bond = Face value - Present value (issue price)
600,000 - 531,180.4727	68819.5273
Interest expense = Present value * market yield
531,180.4727 * 6% (semiannual)	31870.82836
Cash = Discounted value (present value)	531,180.47
(It is the amount that will be paid for the purchase of the bond)